Periodical Report 2015

Transcription

1 Periodical Report 2015

2 Contents Chapter A B Subject Description of the Corporation's Business Management Discussion and Analysis C Financial Statements as at December 31, 2015 D E Additional Details Regarding the Corporation Report Regarding Effectiveness of Internal Auditing Over Financial Reporting and Disclosure

3 Chapter A Description of the Corporation's Business

4 Table of Contents Chapter A - Description of the General Development of the Corporation's Business Introduction Corporate Operations and Description of Its Business Development Sectors of activity Equity investments in the Company and transactions in its shares Dividend Distribution... 6 Chapter B - Other Information Financial Information Regarding the Corporation's Sectors of Operation... 7 Chapter C Business Description of the Corporation by Sectors Packaging Paper Sector Structure of the packaging paper operating sector and changes thereto Limitations, Legislation, Regulations and Special Constraints applicable to the packaging paper operating sector Changes to volume of operations in the packaging paper sector and its profitability Developments in the packaging paper sector and changes to its customer profile Substitutes for products in the sector of operations Products and services in the packaging paper operating sector Distribution of revenues of products and services in the packaging paper operating sector Packaging paper sector clients Marketing and distribution in the packaging paper sector Competition in the packaging paper sector Fixed assets and output capacity in the packaging paper sector Research and Development Raw materials and suppliers in the packaging paper sector Working capital Restrictions on and Supervision of Corporate Operations in the Packaging Paper Risk factors in the packaging paper operating sector... 16

5 8. Packaging and cardboard products sector The packaging and cardboard products operating sector and changes therein Changes in the volume of operations and profitability in the packaging and cardboard products operating sector Substitutes for products in the sector of operations Products and services in the packaging and cardboard products operating sector Distribution of revenues from products and services in the packaging and cardboard products operating sector Customers of the packaging and cardboard products segment of activity Competition in the packaging and cardboard products operating sector Seasonality Output capacity in the packaging and cardboard products operating sector Fixed assets, real estate and facilities in the packaging and cardboard products operating sector Raw materials and suppliers in the packaging and cardboard products operating sector Working capital Material agreements Risk factors in the packaging and cardboard products operating sector Sector of collection and processing services Structure of the sector of collection and processing services Limitations, Legislation, Regulations and Special Constraints applicable to the sector of collection and recycling services Changes to volume of operations and profitability in the sector of collection and recycling services Products and Services in the sector of collection and recycling services Distribution of revenues from products and services in the sector of collection and recycling services Clients of the sector of collection and processing services Competition in the sector of collection and processing services Output capacity in the sector of collection and recycling services Fixed assets, real estate and facilities in the sector of collection and recycling services Raw materials and suppliers in the sector of collection and processing services... 26

6 9.11. Working capital Restrictions on and Supervision of Corporate Operations in the sector of collection and processing services Risk factors in the sector of collection and processing services Fine paper sector Structure of the fine paper sector Changes to volume of operations in the sector and its profitability Developments in the fine paper sector and changes to its customer profile Substitutes for products in the sector of operations Products and services in the fine paper sector Distribution of revenues of products and services in the fine paper sector Customers of the fine paper sector Marketing and distribution in the fine paper sector Competition in the fine paper sector Output capacity in the fine paper sector Fixed assets, real estate and facilities in the fine paper sector Raw materials and suppliers in the fine paper sector Working capital Material agreements in the fine paper sector Risk factors in the fine paper sector Office Supplies Marketing sector Structure of the Office Supplies Marketing sector Changes to volume of operations in the sector and its profitability Critical success factors in the sector of operations Substitutes for products in the sector of operations Products and Services in the office supplies marketing sector Customers in the office supplies marketing sector Marketing and distribution in the office supplies marketing sector Competition in the office supplies marketing sector Fixed assets, real estate and facilities in the Office Supplies Marketing sector... 37

7 Working capital Risk factors in the office supplies marketing sector Chapter D - Additional Information Regarding the Corporation Critical success factors in the packaging paper sector of operations and changes therein Major barriers to entry and exit in the Group's activity sectors and changes therein Fixed assets, real estate and facilities Human resources Staff employed according to sectors of activity Employment agreements Agreements with senior officers Restrictions and Supervision of Company Operations The Natural Gas Market Council s decision regarding capacity exhaustion events Financing - Reportable credit Taxation Environmental Risks and Management thereof Material Agreements Legal Proceedings Business objectives & strategy and anticipated development over the next year Risk factors... 57

8 Chapter A - Description of the General Development of the Corporation's Business 1. Introduction The Board of Directors of Hadera Paper Ltd. is honored to hereby present the description of the corporation's business as at December 31, a review of the corporate description and development of its business in 2015 (hereafter: "the reported period"). The report was formulated in accordance with the Securities Regulations (Periodic and Immediate Reports), Legend For the sake of convenience, in this periodical report the following abbreviations shall have the meaning noted adjacent to them: "Euro" - "Amnir" - "Graffiti" - "Dollar" - "TASE" - "Financial Statements" - "The Company" or "Hadera Paper" - "The Group" - "Subsidiaries" - "Hogla-Kimberly" - Euro currency of European Monetary Union; Amnir Recycling Industries Ltd.; Graffiti Office Supplies & Paper Marketing Ltd. and its subsidiaries. US dollar The Tel Aviv Stock Exchange Ltd.; The Company s financial statements as of report date. Hadera Paper Ltd. The Company and its subsidiaries, as defined below; Companies directly and/or indirectly controlled by the Company 1 : Hadera Paper - Packaging Paper and Recycling Ltd, Hadera Paper Development and Infrastructures Ltd, Amnir Recycling Industries Ltd, Carmel Frenkel Ind. Ltd, Hadera Paper - Printing and Writing Paper Ltd. (in voluntary liquidation), Graffiti Office Supplies & Paper Marketing Ltd, subsidiaries thereof, and additional companies as detailed in section 2.11 hereafter; Hogla-Kimberly Ltd.; "The Companies Law" - The Companies Law, 1999; "The Securities Act" - The Securities Act, 1968; "Carmel" - Carmel Frenkel Ind. Ltd. "Report date" - December 31, 2015; In respect of this report, "control" - as defined in Section 1 of the Securities Act. 1 1

9 "Hadera Paper Packaging" - Hadera Paper - Packaging Paper and Recycling Ltd.; "Hadera Paper Printing" - Hadera Paper - Printing and Writing Paper Ltd. (In voluntary liquidation); "Hadera Paper Infrastructures" - "FIMI" - Hadera Paper Development and Infrastructures Ltd.; FIMI Opportunity V (Delaware) LP and FIMI Israel Opportunity V, LP, whereas FIMI V 2012 Ltd. is the general partner of both companies The degree to which information included in this report is material, including description of Group companies and description of their business, is provided from the Company's viewpoint, and in some cases the description has been elaborated to provide a comprehensive view of the topic described Holding stakes in shares of investee companies are rounded to the nearest percentage point, and are current in proximity to the date of this report, unless otherwise indicated. Holding stakes in shares of an investee company are calculated out of total actual issued share capital of said investee, not accounting for potential dilution due to exercise of options and other convertible securities issued by the Company, unless otherwise indicated. In calculating the holding rate in Company shares, fully diluted, the exercise of all options and other convertible securities issued at that date was taken into account, unless stated otherwise. Consequently, holding percentages may change according to the exercise of options granted to the remaining shareholders in the same investee company In the description of investee companies, data that is based on various surveys and studies is occasionally included. The Company is not responsible for the content of such surveys and studies Within the framework of addressing the Company's consolidated financial data, separate financial data of Hogla-Kimberly whose sale was finalized on March 16, 2015 is not included This report refers to both men and women - the occasional use of the masculine form is for purposes of convenience only Chapter A of this annual report should be read along with its other chapters, including the notes to the financial statements. 2. Corporate Operations and Description of Its Business Development 2.1. The Company was incorporated in Israel as a private company in In 1959, the Company held the initial public offering of its securities, pursuant to the prospectus then published, and as of that date, Company shares were listed for trading on the stock exchange The Company's control holder is FIMI fund, this pursuant to its holdings in approximately 59.19% of issued share capital and voting rights in the Company (approximately 56.78% in full dilution). FIMI fund purchased the control of the Company from Clal Industries Ltd. according to an agreement from June 24, 2015 that was finalized on August 13, For further details, see section 4.1 hereafter and Company 2

10 reports dated June 24, 2015 and August 13, 2015 (reference numbers: and , respectively) The Company is engaged - directly or through its subsidiaries in the manufacture and sale of packaging paper, manufacture of corrugated board containers and packaging for consumer goods, collection and processing of paper waste and plastic recycling, manufacture and marketing of fine paper, and in marketing office supplies The Company's activity segments are operating in synergy that reflects the value chain of the paper production sector. Within this framework, the paper waste collected and processed by the Group constitutes as main raw material in the sector of packaging paper production and sale. Furthermore, the packaging paper manufactured by the Group constitutes as main raw material in the Group's activity in the sector of corrugated cardboard packages and consumer goods packaging manufacturing In recent years, the Company is taking efficiency and savings measures for the purpose of addressing the changing business environment of the Company's sectors of operation. Within this framework, during the report period, the Company took actions for reinforcing its financial stability and reducing leverage, inter alia via exercising its holdings in sectors that are not included in its business core, shares issuance, capital raising, and taking measures intended for reducing the Company's fixed costs. In parallel, the Company is examining opportunities for capital investments or purchasing activities that may have potential as growth engines which can be incorporated in its business In parallel, in March 2015, the Company completed the sale of all its holdings in Hogla- Kimberly, this in return for approximately NIS 650 million. A transaction was finalized in August 2015, within the framework of which the Company sold all (100%) holdings (direct and indirect) in Advanced Integrated Energy Ltd. and the Company's existing energy center equipment (including the Company's power station) to ICPower Ltd., this in return for a total of approximately NIS 60 million. For further details, see section 20 below. Furthermore, during December 2015, the Company issued ordinary shares in return for approximately NIS 150 million. For further details, see section 4 below. Moreover, the Company has been and is taking measures for increasing the synergy between Group units and streamlining their activities, including by consolidating some production sites and flattening the organizational structure, including workforce reduction along with decrease of Group headquarters and the number of executives. The Company believes that these proceedings may contribute to the financial improvement presented for most of its business activity sectors as derived from its financial results for To the Company's best knowledge, based on FIMI fund reports to the Company, FIMI V 2012 Ltd. is the general partner in two limited partnerships which directly hold Company shares: FIMI Opportunity V (Delaware) LP and FIMI Israel Opportunity V, LP. FIMI V 2012 Ltd. is a company under (indirect) control of Mr.Yishay Davidi. For further details see the Company's Immediate Report regarding stakeholder holdings dated March 7, 2016 (reference number: ). 3

11 2.7. The following diagram illustrates the Company's holdings in major Group companies as at December 31, 2015: Hadera Paper Ltd. 100% 100% 100% 94% 100% Graffiti Office Supplies & Paper Marketing Ltd. Hadera Paper Printing and Writing Paper Ltd. (1) Amnir Recycling Industries Ltd. Carmel Frenkel Ind. Ltd. Hadera Paper Packaging Paper and Recycling (1) Within the framework of an internal reorganization process for Company holdings, it was decided upon the transfer and sale of Hadera Paper Printing to Hadera Paper as of December 31, 2015, and voluntary liquidation of Hadera Paper Printing. Within this framework, all holdings in Hadera Paper - Printing and Writing Paper Marketing Ltd. were transferred to Hadera Paper. 4

12 2.8. Changes in corporation investments in subsidiaries and corporate business during the report period Within the framework of a transaction which was finalized in March 2015, the Company sold its entire holdings - direct and indirect (49.9%) - in Hogla-Kimberly to Kimberly-Clark, that held approximately 50.1% of Hogla-Kimberly s share capital prior to the transaction, in consideration of the total sum of approximately NIS 650 million, partly due to the sale of Hogla-Kimberly shares and partly on account of the companies undertaking a non-competition agreement with Hogla-Kimberly operations. For further details, see section 20.1 below Within the framework of a transaction which was finalized in August 2015, the Company sold all its (100%) holdings (direct and indirect) in Advanced Integrated Energy Ltd. and the Company's existing energy center equipment (including the Company's power station) to ICPower Ltd., this in return for a total of approximately NIS 60 million. For further details, see section 20.2 below. 3. Sectors of activity As at report date, the Group (directly and via subsidiaries) has five sectors of activity: 3.1. Packaging paper - the Group's activity in this sector includes the manufacture and sale of packaging paper produced from 100% cardboard and newspaper waste which is collected mainly by Amnir. The recycled packaging paper is primarily utilized as raw material for the corrugating industry (hereafter: "the corrugators"). Most of the Group s manufacturing consists of fluting paper (paper that serves as raw material for production of corrugated board packages, serving as a separation between the external layer of the box and its internal side). Moreover, Hadera Packaging Paper manufactures recycled paper types that are utilized as an alternative for pulp-based packaging paper. For further details regarding this operating sector, see Section 7 elow Packaging and Cardboard Products - Group operations in this activity segment, which are executed by Carmel, include production and sale of cardboard products intended primarily for customers in the industry and agriculture sectors, and cardboard shelf packaging for consumer goods, mostly used in industry, agriculture, food, beverages, pharmaceutics and cosmetics. Packaging and cardboard are also produced from recycled paper produced by Hadera Paper Packaging, inter alia. For further details regarding this activity sector, see Section 8 below Collection and recycling services - This activity sector includes the system of cardboard and paper waste collection which is carried out by Amnir and its subcontractors, and its processing for the purpose of waste recycling and utilization for packaging paper production. Paper waste is mainly collected from various sources around the country by Amnir, and is processed at its plants. As part of paper production processes, some of the Group's companies, specifically Hadera Paper Printing, are utilizing paper waste as key raw material. As part of Group activity in this sector, Amnir also collects and processes plastic waste. For further details regarding this operating sector, see Section 9 below Fine Printing Paper - The Group's operations in this sector consist of the manufacture and marketing of fine paper, marketing of imported paper, such as coated paper and special paper, complementary to its product range. For further details regarding this operating sector, see Section 10 below Office supplies marketing - Group operations in this sector are carried out via Graffiti, and include marketing office and paper supplies, primarily to the institutional and business markets, which include, inter alia: government offices, banks, HMOs and other businesses, as well as 5

13 distribution to wholesalers and retailers. For further details regarding this operating sector, see Section 11 below. 4. Equity investments in the Company and transactions in its shares 4.1. In August 2015, FIMI fund purchased all holdings of Clal Industries Ltd. via the Company's ordinary shares (3,007,621 ordinary shares) which constituted approximately 59.09% of the Company's issued share capital at that time, in return for a total of approximately NIS 354,546 thousand (which reflects a sum of approximately NIS per sold share). For further details, see Company reports dated June 24, 2015 and August 13, 2015 (reference numbers: and , respectively) On May 26, 2013, the Company issued a shelf prospectus, as amended on June 20, 2013, which includes, inter alia, up to 1,000,000 company ordinary shares registered in the owner's name, of NIS 0.01 par value each (hereinafter: "the shelf prospectus"). On May 3, 2015, the Israeli Securities Authority approved the extension of shelf prospectus validity until May 27, For details, see the Company s Immediate Report dated May 4, 2015 (reference number: ) During January and February 2014, the Company issued 190,362 option notes (Series A)., registered by name, which can be actualized until January 18, 2017 in a manner where each option note (Series A) can be actualized into one regular Company share. For further details, see the Company's Immediate Report dated January 30, 2014 and February 03, 2014 (reference numbers: and , respectively) On December 10, 2015, the Company published a shelf prospectus for issuance and listing of ordinary shares for trade according to the shelf prospectus. Within this framework, the Company issued 1,295,220 ordinary shares in return for approximately NIS 150 million. For further details regarding the shelf prospectus and public offering results, see Immediate Reports dated December 10, 2015 and December 31, 2015 (reference numbers: and , respectively). 5. Dividend Distribution 5.1. The Company did not distribute any dividends to its shareholders during the past two years. As of December 31, 2015, the Company possesses retained earnings that are eligible for distribution, in the sum of approximately NIS 372 millions We note that, as of the report date, the Company has yet to adopt a dividend distribution policy According to the debentures' (Series 6) deed of trust, the Company committed to not distribute dividend and/or self-purchase its shares in case its equity according to the Company's reviewed or audited consolidated financial statements, as the case may be, will be reduced to less than NIS 500 (five hundred) million after dividend distribution and/or self-purchase, as the case may be. For further details see section 5.6 to the debentures' (Series 6) deed of trust, as included in the Company's Immediate Report dated January 28, 2014 (reference number: ). 6

14 Chapter B - Other Information 6. Financial Information Regarding the Corporation's Sectors of Operation 6.1. Below is data regarding financial information about the Company's sectors of operation in the years 2015, 2014 and 2013 (in NIS thousands): Year ended December 31, 2015 Packaging paper & recycling sector Packaging and Cardboard Products sector Sector of collection and processing services Fine paper sector Office Supplies Marketing sector Adjustments to consolidated* Consolidated 1. Revenue a. External sector revenues 428, , , , ,087-1,741,442 b. Revenues from other operating sectors 101,804 5, ,900 28, ( 275,666) - c. Total 530, , , , ,805 ( 275,666) 1,741, Costs* a. Costs that constitute revenues of another sector of the corporation 142, , ,642 24,698 ( 275,666) - b. Other Costs 357, , , , ,091 ( 438,133) 1,354,569 c. Total 499, , , , ,789 ( 713,799) 1,354,569 d. Fixed costs * 75, , , ,960 47,953 ( 438,133) 152,138 e. Variable costs 424, , , , ,836 ( 275,666) 1,202, Profit (loss) from ordinary operations 30,426 30,426 6,393 3,661 ( 89,756) ( 1,984) 438,133 a. Operating income (loss) attributed to the owners of the parent company 30,426 6,009 3,661 ( 89,756) ( 1,984) 438, ,489 Operating income (loss) attributed to rights that b. do not offer control Total assets as at ,651, , , ,142 73,035 47,711 2,557, Total liabilities as at ,654 70,719 58,309 60,277 38,627 1,289,987 1,575,573 7

15 Year ended December 31, 2014 * Packaging paper & recycling sector Packaging and Cardboard Products sector Sector of collection and processing services Fine paper sector Office Supplies Marketing sector Adjustments to consolidated* Consolidated 1. Revenue a. External sector revenues 443, , , , ,479-1,757,362 b. Revenues from other operating sectors 89,241 6, ,172 23,710 1,310 ( 271,494) - c. Total 532, , , , ,789 ( 271,494) 1,757, Costs* a. Costs that constitute revenues of another sector of the corporation 151,155 89,354 1,999 5,576 23,410 ( 271,494) - b. Other Costs 304, , , , , ,869,638 c. Total 455, , , , ,099 ( 271,068) 1,869,638 d. Fixed costs 123, , , ,358 48,285 ( 72,686) 493,138 e. Variable costs 332, , , , ,814 ( 198,382) 1,376, Profit (loss) from ordinary operations 55,527 76,982 ( 23,823) ( 4,981) ( 162,718) 2,690 (426) a. b. Operating income (loss) attributed to the owners of the parent company 76,982 ( 22,394) ( 4,981) ( 162,718) 2,690 ( 426) ( 110,847) Operating income (loss) attributed to rights that do not offer control - ( 1,429) ( 1,429) 4. Total assets as at ,554, , , , ,440 ( 137,093) 2,433, Total liabilities as at ,955 69,017 59,997 74,791 33,694 1,542,339 1,847,793 * Adjustments are primarily for general assets not assigned to a specific operating sector. 8

16 Year ended December 31, 2013 * Packaging paper & recycling sector Packaging and Cardboard Products sector Sector of collection and processing services Fine paper sector Office Supplies Marketing sector Adjustments to consolidated* Consolidated 1. Revenue a. External sector revenues 430, , , , ,814-1,823,094 b. Revenues from other operating sectors 106,517 6, ,835 28,650 1,054 ( 311,434) - c. Total 536, , , , ,868 ( 311,434) 1,823, Costs* a. Costs that constitute revenues of another sector of the corporation 168, , ,867 27,272 ( 311,434) - b. Other Costs 371, , , , , ,885,394 c. Total 540, , , , ,413 ( 311,196) 1,885,394 d. Fixed costs 126, , , ,698 33,030 ( 269,389) 313,207 e. Variable costs 413, , , , ,383 ( 41,807) 1,572, Profit (loss) from ordinary operations (3,273) ( 3,273) 4,067 2,662 ( 63,973) ( 1,545) (238) a. b. Operating income (loss) attributed to the owners of the parent company ( 3,273) 3,823 2,662 ( 63,973) ( 1,545) ( 238) ( 62,544) Operating income (loss) attributed to rights that do not offer control Total assets as at December 31, ,336, , , , ,966 ( 30,266) 2,380, Total liabilities as at December 31, ,327 84,498 72,129 51,581 42,316 1,335,131 1,647,982 * Adjustments are primarily for general assets not assigned to a specific operating sector Developments in the Past Three Years, the General Environment and the Impact of External Factors on the Company For a description of the developments that took place in the past three years and of the general environment and the impact of external factors on the Company, see Section A2 of the Company s Management Discussion. 9

17 Chapter C Business Description of the Corporation by Sectors 7. Packaging Paper Sector 7.1. Structure of the packaging paper operating sector and changes thereto The packaging paper operations focus primarily on the manufacture and sale of packaging paper, and are conducted by the Group via its subsidiary, Hadera Paper Packaging Packaging paper is intended, as mentioned, primarily for the corrugated cardboard industry, as raw material intended for the manufacture of cardboard containers used as product packaging. The corrugated cardboard industry serves the following sectors: industry, agriculture and the food and beverages. Consequently, economic activity and export levels have significant impact on demand for packaging paper. In this context, it should be noted that the increase in e- commerce which led to an increase in the volume of international and local deliveries and had a positive impact on demand for packaging products, and subsequently also on demand for the packaging paper manufactured by the Company The majority of production conducted by the Group in this sector consists of fluting paper (incorporated in corrugated board boxes as a wavy layer) and liner paper which form the box walls. All of the packaging paper produced by Hadera Paper Packaging, is made of recycled paper waste. Globally, packaging paper is also produced from virgin fibers (produced by pulp). In this sector of operations, the Group also produces additional paper types made of 100% recycled fibers that constitute a replacement for the pulp-based packaging paper Limitations, Legislation, Regulations and Special Constraints applicable to the packaging paper operating sector Considering the nature of this operating sector, Group activity in the packaging paper segment are subject to regulation in different aspects, including: environmental protection provisions (such as: Maintaining Cleanliness Law, Hazard Prevention Law, Hazardous Materials Law, Clean Air Law), permits and licenses (such as: Business Licensing Law), Anti-Trust (such as: Anti-Trust Law, Consensus Ordinances), Natural Gas Sector Law, etc. For further details regarding the regulation that applies to Group s activities in the packaging paper sector, including restrictions that apply to the Company under the Anti-Trust Law, , and the Company s declaration as a monopoly in the packaging paper sector, see Section 7.16 below Changes to volume of operations in the packaging paper sector and its profitability Based on internal Company estimates, the consumption of packaging paper in Israel in recent years did not change significantly, and averaged at 365 thousand tons per year. The Company believes that in recent years, the share of recycled packaging paper out of total packaging paper consumed in Israel has increased and constituted approximately 63% in proximity to the report date. According to Company estimates that are based on industry publications, the rate of recycled packaging paper from total packaging paper consumed in Europe averages at approximately 70% The Company believes that there is potential for increasing the volume of marketing packaging paper manufactured by the Group in Israel. Said increase is achievable, inter alia, via the encouragement of consuming recycled packaging paper on account of pulp-based packaging paper and import of both recycled paper and pulp-based paper by foreign Company clients In light of stated trends and Company efforts for increasing its sales in Israel, the Company increased the quantity of packaging paper sold by it by approximately 20% in 2015, compared 10

18 with the quantity sold by the Company in Said quantitative increase was accompanied by a slight erosion of sale prices, this inter alia in light of the increase in quantities and granted discount for encouraging such increase, and subsequently, NIS increase versus the Euro, while considering the fact that some of the competition for Company products is import from Eurozone countries Below is a graphical depiction of developments in prices of main paper produce - fluting (according to PPI (RSSI) data) in Europe, in /ton: As evident from the graph above, the selling prices of fluting-type paper have increased in Europe in A price decrease was recorded in the first half of 2014, whereas a slight increase was recorded in the second half, after which the price remained stable for three quarters. Another slight price increase was recorded in the third quarter of As at report date, the Company does not expect a significant change in price trends Paper waste, which is the Group s main raw material in this sector, is purchased from Amnir. For details regarding trends of global paper waste prices, see section below The Company's operating profit has improved in 2015, this inter alia in light of decrease in the cost of raw materials and operational streamlining. It should be noted that the improvement in said operating profit was partially offset in light of finalizing the sale of the energy array as detailed in section 20.3 hereafter, and attributing the relative share from the non-recurring loss in the amount of approximately NIS 16.8 million due to the sale transaction to the activity sector Information concerning the potential for an increase in the volume of recycled packaging paper marketing in Israel at the expense of paper imports and further price trends in the sector constitute as forward-looking information, as defined in the Securities Act, and merely consist of forecasts and estimates by the Company which are not certain to materialize and are based on information available to the Company as of the report date. The aforementioned Company forecasts and estimates may not materialize, in whole or in part, or may differ from current forecasts and estimates, due to multiple factors, including changes in demand in markets in which the Group operates, global supply and cost of paper products, developments and changes to regulation of the operating sector and/or materialization of any of the risk factors set forth in section 24 hereafter. 11

19 7.4. Developments in the packaging paper sector and changes to its customer profile In recent years, clients in Israel (and worldwide) seem to be transitioning to using paper made of recycled fiber rather than paper made of pulp-based virgin fiber (imported), due to, inter alia, higher cost of virgin fiber compared to recycled fibers, which impacts the paper price. It should be noted that in recent years, the gap between the cost of virgin fiber and recycled fiber has been closing, inter alia in light of decrease in virgin fiber prices, although there is no certainty that this trend will continue. The transition to recycled paper was made possible, inter alia, by technological developments in this field, allowing recycled fiber to be used to produce paper with strength and other qualities similar to those of pulp-based paper. Furthermore, in recent years awareness of environmental protection issues has grown, which may assist the growth of penetration rate of paper made of recycled fiber Substitutes for products in the sector of operations Hadera Paper Printing is the only producer of packaging paper in Israel, although the sector is competitive due to importers operating on it. Group products in the sector have substitutes from competitors, and substitutes from virgin paper Products and services in the packaging paper operating sector The Group's operations in this operating segment involve the production and sale of packaging paper from recycled fiber (i.e. from paper waste collected for recycling). As aforementioned, this paper is used as raw material for production of cardboard packaging by the corrugated cardboard industry. Most of the manufacturing performed by the Group consists of fluting paper (paper integrated into corrugated cardboard packages), and liner paper (package sides). For further details, see Sections below. It should be noted that in recent years, the Company is engaged in developing paper types based on 100% recycled fibers, whose high quality allows replacing packaging paper based on pulp in the corrugated board industry in Israel and overseas (hereinafter: "pulp replacements"). In recent years, the Company took action for increasing the sales of pulp replacements in the local market on account of pulp-based paper. The development of pulp replacements is based on fiber characterization, the development and implementation of various chemical additives and the use of advanced manufacturing technologies. The Group continues to take actions towards development and enhancement of pulp replacement characteristics, while focusing on further development of strength and durability to moistness and cooling of papers from recycled materials, this for the purpose of expanding the range of products marketed by the Group so that these can replace a larger share of the imported pulp-based packaging paper, thus increasing the Group's profitability Distribution of revenues of products and services in the packaging paper operating sector Most of the revenues in this sector of operations originate from the sale of packaging paper. Below is information regarding the composition of revenues from products in the packaging products and cardboard operating sector, where revenues exceed 10% of total Company revenues on consolidated basis, based on its financial statements (NIS in millions) 3 : It should be noted that sector revenue (including due to inter-company sales) was taken into account in the calculation of total Company revenue, and total Company revenue, consolidated (net of inter-company sales). 3 12

20 Product Sale of packaging paper Revenue Percentage of total Company revenues, consolidated Quantity sold (thousand tons) Revenue Percentage of total Company revenues, consolidated Quantity sold (thousand tons) Revenue Percentage of total Company revenues, consolidated Quantity sold (thousand tons) % % % Packaging paper sector clients As of the report date, the sector is dependent on four key clients that produce corrugated board and cardboard packaging (corrugators), including Carmel, a subsidiary of the Company (hereinafter jointly in this section: the clients ). Company revenues from sales to Carmel in each of the years 2015 and 2014 accounted for 6% and 5% of total Company revenues in its consolidated financial statements, respectively. Rate of revenue from sales to each of the three other material customers in 2015 and 2014 accounted for: (a) 5% and 6% of total sales revenues for the Company on its consolidated financial statements, respectively; (b) 5% and 4% of total sales revenues for the Company on its consolidated financial statements, respectively; (c) 3% and 2% of total sales revenues for the Company on its consolidated financial statements, respectively. The Company has no long-term agreements with the aforementioned clients. To the best of the Company's knowledge, the same applies to agreements between these clients and Company competitors. Contracting with each customer refers to an annual volume of packaging paper to be delivered to the customer, whereas price is usually set in advance every period, and is derived, inter alia, from the purchase volumes of each client Due to the industry structure (one local producer and a limited number of customers), the sector is dependent on each of the aforementioned clients, and termination of the contract with any one of them may have a material adverse effect on Company results. The aforementioned clients are long-standing customers of the Group, and have been in business with the Company for many years; in practice, the Group has been successfully maintaining contracts with the clients for years by ensuring current delivery and service with a short lead time, which allows it to enjoy the benefit of a local supplier Sales to the local market amounted to approximately 219 thousands of tons in 2015, and approximately 177 thousands of tons in In 2016, the Company is working towards maintaining the same volumes of quantities sold by it in Furthermore, the packaging paper sector exports to various clients abroad (Turkey, US, Europe, Egypt, and more). In 2015, sales of packaging paper to overseas customers amounted to 70 thousand tons and 107 thousand tons, accounting for 6% and 9% of Group sales turnover on a consolidated basis for the same years, respectively. Hadera Packaging Paper intends to maintain sales to export markets in 2016, with preference to sales on the domestic market, while considering, inter alia, the shipping cost of its products to other countries. In general, the mix of countries to which the Group exports is determined based on Group profitability considerations, and changes from time to time. In light of increasing competition in some key export Company marketers, in recent years the Company increased export to additional markets. The Company believes it can discontinue operations in any of the countries to which it exports, although such change may impact export profitability Aforementioned information regarding trends in Company sales constitutes forward-looking information as defined in the Securities Law, and only constitutes as forecasts and assessments on behalf of the Company, the realization of which is not certain and is based on information existing in the Company as of the date of the report. Company forecasts and estimates may not materialize, in whole or in part, or may significantly differ from estimates due to multiple factors, including business opportunities available to the Group, changes in demand in markets 13

21 wherein the Group operates, global supply and cost of paper products and/or materialization of any of the risk factors set forth in Section 24 hereafter Customer attributes Below is a distribution of major sales in this sector (packaging paper) by customer attributes: Revenues In NIS Millions Domestic clients Export customers Marketing and distribution in the packaging paper sector Marketing and distribution of products in the local market are conducted directly by sector employees opposite the customers Marketing and distribution to export markets are conducted through local agents or through international marketing and sales companies that purchase the paper from Hadera Paper Packaging and sell it to their own customers overseas. Although in some countries to which the operating sector exports goods there is a sole agent for the country or region, the Company believes that should this agent discontinue working with the Group, an alternate agent or local customer could be located within a relatively short time, although such change may affect the profitability of export operations. The Company therefore estimates that it has no dependence upon any of the agents Shipping to customers, to the extent that it is carried out by the Group, is carried out mainly by external shippers. Marine shipping companies are engaged for export. The Company has no exclusive agreements with any of the aforementioned shipping companies. The Company also has no dependency on any of these shipping companies Competition in the packaging paper sector As mentioned above, Hadera Paper Packaging is the sole producer in Israel of packaging paper, hence the competition in the packaging paper business is against direct imports by customers. There are no import limitations as of report date. Imports into Israel include all paper types produced in Israel at different paper qualities To the best of the Company's knowledge, the Group's major competitors in Israel are the following foreign vendors: Varel - Germany, Kipas-Turkey, Modern Carton - Turkey, Propapier - Germany, Schollershammer - Germany, Mondi - Hungary and Hamburger - Austria Based on Company internal estimates, the Group's market share in sales of packaging paper used as raw material for the corrugating industry in Israel has increased to approximately 57% in 2015 (data representing annual average) The Group competes in this operating sector by providing high-quality products, as well as by ensuring a high level of on-going delivery and service with a short lead time compared to other vendors, which affords it the benefit of local supplier Fixed assets and output capacity in the packaging paper sector 14

22 The Group's packaging paper manufacturing plant in Hadera houses two paper machines (Machine 2 and Machine 8) whose total annual production capacity is 320 thousand tons for both machines. The machines possess the potential for operating at nearly full capacity, and normally operate 24 hours a day in 3 shifts (except for planned maintenance stops) Below is machine production data (in thousands of tons) for 2015 and 2014: Potential output capacity (as at report date) Machine 2 Machine 8 Total Approx. 90 Approx. 230 About Research and Development As stated, in recent years, the sector engages in the development of papers from pulp replacements, which are paper types based on 100% recycled fibers whose high quality allows substituting pulp based packaging paper in the corrugated cardboard industry in Israel and overseas. The Group continues to take actions for the development and enhancement of paper replacement attributes. Development costs are not material for the Group. The activity sector engages in research and development of several technologies intended for improving the quality of paper for corrugators, for the purpose of achieving higher level of imported paper alternatives: Nano-fiber research with Melodea research company that operates on the campus of the Agricultural Faculty in Rehovot. Cellulose glue research with researchers from the Chemical Engineering Faculty, Technion. Adjusting the green technology of the Swedish company Organoklick to the packaging paper properties required to the Company Raw materials and suppliers in the packaging paper sector Paper waste - Paper waste constitutes as the main raw material for the packaging paper operating sector. The main source of paper waste is the Group's collection and recycling activity that is conducted by Amnir. Hadera packaging Paper is purchasing paper waste from Amnir. An additional part of the waste that is consumed by the paper machines is the waste purchased from corrugated board packaging producers (waste created in the process of creating the packages for corrugator clients that is sold to the Group) Starch The Group purchases starch from Galam Ltd. (hereinafter: Galam ), used by the Company for paper production. Galam is the sole manufacturer of starch in Israel, but there is competing starch import at competitive prices, therefore the Company believes it is not dependent on Galam as starch supplier. However, should Hadera Paper Printing discontinue doing business with Galam, a short-term damage will be incurred and short term acquisition expenses might increase, while production shutdown in Galam might cause delay in the short term, also on the Group's production It should be noted that in the packaging paper sector, the Group has additional purchasing contracts with suppliers for the purchase of auxiliary materials such as chemicals, adhesives, 15

23 7.14. Working capital felt, screens, machine spare parts, etc Below is data from the financial statements regarding sector activities: The amount included in the financial statements as at 2015 (NIS thousands) Current assets 1,149,039 Current liabilities 669,390 Surplus of assets over current liabilities Average credit duration 479,649 Below is data regarding average credit duration and amount for suppliers and customers in 2014 and 2015 (in NIS millions): 2015 Average 2014 Average Average credit volume Average credit days Average credit volume Average credit days Customers Suppliers In the area of operation, the average number of inventory days in 2015 was 38 days (including inventory of raw materials and maintenance materials) Restrictions on and Supervision of Corporate Operations in the Packaging Paper Antitrust In December 1988, Hadera Paper was declared a monopoly in the production and marketing of paper in rolls and sheets - by the Israel Antitrust Authority, by virtue of its authority pursuant to the Antitrust Act. In July 1998 this declaration was partially rescinded with regard to fine paper in rolls and sheets. The declaration has not been rescinded for packaging paper in rolls and sheets. Other than directives related to the Anti-Trust Law, the Company received no special instructions from the Anti-Trust Commissioner regarding its declaration as a monopoly. As of report date, Company declaration as a monopoly had no material impact on its operations, profitability or financial standing. The Company cannot assess the future implications of this declaration For information regarding other regulatory provisions applicable to companies in this sector and to other Group companies, see Section 16 below Risk factors in the packaging paper operating sector For details regarding additional risk factors, see section 24 hereafter. Special Risk Factors 16

24 Customers Because of the small number of customers in Israel for packaging paper finished products, there is a dependency on customers in Israel, and decrease in the number of customers impair activity results. However, due to the advantages of being a local producer, this risk is estimated as medium by the Company. Regarding export customers, sales are conducted through foreign sales agents. In the export activity, the Company is working towards diversifying the markets to which it exports its products and operates on these markets via local agents. The Company believes that it is not dependent on those local agents Paper waste - Failure to locate sufficient quantity of paper waste, which is a key raw material for manufacturing activities in the sector, will impair the Group s ability to realize its manufacturing potential in packaging paper Monopoly - The Company has been declared a monopoly in the packaging paper sector in rolls and sheets, as the term is defined in the Antitrust Law, and is subject to the laws applicable to a monopoly in Israel. Statutory means set forth in the Antitrust Act confer on the Supervisor, inter alia, the right to intervene on matters which may impact the public, including setting business restrictions on the corporation, such as price supervision. In case such restrictions are enforced, these may adversely impact operating sector results Extent of risk factor impacts Following below is a list of risk factors and their degree of impact on the sector of operations: Risk factors Level of Impact Major Impact Medium Impact Minor Impact Special Factors Paper waste Customers Monopoly 8. Packaging and cardboard products sector 8.1. The packaging and cardboard products operating sector and changes therein Group's activity in the sector is conducted by the subsidiary Carmel. The Company's holding rate of Carmel is approximately 94% The packaging products and cardboard operating sector focuses primarily on the manufacture and sale of cardboard packaging that serve primarily customers in industry and agriculture sectors, and on the manufacture and sale of cardboard shelf packaging for consumer goods that serve primarily industry, agriculture, pharmaceuticals, food, cosmetics, and high-technology industries. Carmel offers unique packaging solutions that are tailored to the needs of its various customers. Furthermore, sector activity also includes digital printing which is mainly utilized for the manufacture and sale of display stands and other cardboard advertising means at points of sale Changes in the volume of operations and profitability in the packaging and cardboard products operating sector The packaging paper (both the paper recycled by the Group and pulp-based paper purchased from abroad) is the main raw material used for the sector's activity, and thus price fluctuations impact the activity sector. 17

25 In the Company s opinion, demands for packaging and board market products in Israel remained relatively stable in recent years The cardboard industry primarily serves clients from industry, agriculture, food and beverages, cosmetics, pharmaceuticals, and high-technology industries. Therefore, economic activity and export levels significantly impact demand for packaging and cardboard products In 2015, the prices of raw materials utilized by the sector decreased moderately, this inter alia in light of NIS strengthening versus the Euro. In light of increasing competition during 2015, sale prices of sector products slightly decreased. It should be noted that raw material prices are also affected by exchange rate fluctuations. The Company does not expect significant changes in sales prices of sector products In light of global trends pertaining to packaging and transportation of goods and Company efforts for increasing its sales, in 2015, the Company increased the number of products sold by it although the stated quantitative increase was accompanied by a slight price erosion for some products. It should be noted that the sector's profitability has improved compared to 2014, this mainly due to operational streamlining measures taken during the year Company estimates regarding trends in the price of raw materials and packaging products at the sector constitute forward-looking information as defined in the Securities Law, and constitute as only forecasts and assessments on the part of the Company, the realization of which is not certain and is based on information existing in the Company as at report date. Company forecasts and estimates may not materialize, in whole or in part. Furthermore, actual results may differ from current forecasts and estimates, due to multiple factors, including business opportunities available to the Group, changes in markets in which the Group operates, global demand, supply and cost of paper products, developments and changes to regulation of the operating sector and/or materialization of any of the risk factors set forth in section 24 hereafter For further details regarding the paper industry, see section 7.3 above Substitutes for products in the sector of operations Packaging products produced by the Group have substitutes, mainly in the sector of plastic packaging Products and services in the packaging and cardboard products operating sector The main products of the activity sector are corrugated cardboard products that constitute an essential part of this sector of operations are manufactured and processed in line with the customers' specific requirements, which are determined according to the type of stored goods, type of packaging, expected weight loads on packaging during transportation, temperature and humidity conditions during storage and transportation, graphic design of the packaging, etc. Manufactured and processed corrugated cardboard products include: (1) "standard" corrugated cardboard containers - boxes manufactured in different sizes that are closed by sealing the upper flaps and the bottom of the box; (2) containers and boxes in different geometric shapes that can be "positioned" by manually folding the cardboard plate without sealing or mechanically folding the flaps using warm glue. These products are primarily sold to machinery-intensive industries that operate at high rates, such as the soft beverage industry; (3) cardboard crates for agriculture: trays that are formed only by using tray forming machines with matching molds in geographic proximity to the final customers; (4) corrugated cardboard sheets - sheets marketed to corrugated cardboard processors that utilize them for manufacture of packaging. It should be noted that within the activity sector, the Group also manufactures cardboard shelf packaging and produces digital printing products for advertising. These products are characterized with high level finish and production in relatively small batches. Carmel is working towards increasing its activity in the sector of digital printing products. 18

26 8.5. Distribution of revenues from products and services in the packaging and cardboard products operating sector Below is information about composition of revenues from products in the packaging and cardboard products operating sector, where revenues exceed 10% of total Company revenues on consolidated basis, based on its financial statements (NIS in millions): 4 Product Sales of packaging and cardboard products Revenue (NIS million) Percentage of Percentage Percentage of Quantity Quantity total Revenue of total Revenue total sold sold Company (NIS Company (NIS Company (thousand (thousand revenues, million) revenues, million) revenues, tons)* tons)* consolidated consolidated consolidated Quantity sold (thousand of tons)* % % % Customers of the packaging and cardboard products segment of activity Most sales of cardboard products are directed to industry and agriculture clients on the local market. As at December 31, 2015, the sector has hundreds of active clients for cardboard products. As of December 31, 2015, the sector s 20 largest customers that purchase cardboard products constituted 54% of their total revenues. Most Group clients in the sector have been permanent Group clients for many years The sector has no dependency on any client or a limited number of cardboard clients, although termination of agreement with one of the largest clients may adversely affect sector results in the short term. The sector does not have a client due to which revenue increased by more than 10% of total Company revenue as stated in the financial statements Following is the distribution of revenue from clients in the cardboard sector by segments: Segment % of total revenue Packaging 16% Agriculture 22% Industry 62% Total 100% Carmel conducts direct marketing activity with it clients, along with maintaining ongoing contact. Product distribution is conducted by external transportation contractors Competition in the packaging and cardboard products operating sector The corrugated cardboard industry is capital-intensive, which constitutes a natural entry and exit barrier for competitors. The main substitute for corrugated cardboard products is primarily plastic packaging products. It should be noted that sector revenue (including due to inter-company sales) was taken into account in the calculation of total Company revenue, and total Company revenue, consolidated (net of inter-company sales). 4 19

27 High competition level continued in 2015 in a manner which led to price erosion of some products. To the best of the Company's knowledge and based on its internal information and assessment, the cardboard packaging market in Israel is dominated by four principal companies: Carmel, Cargal Ltd, YMA 1990 Packaging Product Manufacturing (a partnership between Kibbutz En HaMifratz and Kibbutz Ge'aton) and Best Cardboard Ltd. According to Carmel estimates, its total sales in each year (2015 and 2014) constitutes for approximately 27% of total market sales In addition, there are 15 cardboard packaging manufacturers with small market shares, which perform the processing activity but not the manufacturing of corrugated cardboard. These manufacturers produce small series of packaging with less advanced machinery compared to those used by Carmel. Carmel estimates that in 2015 and 2014, the total annual volume of the corrugated board industry amounted to 320 and 325 thousand tons, respectively, while the estimated sales in these years amounted to NIS 1,500 million Carmel handles existing competition in the activity sector as follows: ensuring high product quality, the advantage of a major market player in terms of size and seniority, efficiency in production and supply, the level and quality of service to the customer and competitive prices, and offering a comprehensive basket of products and services. Within this framework, all activities conducted by the sectors were consolidated in order to offer a comprehensive product basket to the clients Seasonality As a rule, most of the demand for cardboard packaging products is in the winter months, primarily November - March (Q1 and Q4), due to the dynamic demand ensuing from agricultural crops. Sales of cardboard packaging products during the first and fourth quarters of the year are higher by an average of approximately 10% compared to sales during the second and third quarters Output capacity in the packaging and cardboard products operating sector The manufacturing activities in the corrugated cardboard sector of Carmel are carried out at the Company site in Caesarea (the facility operates some of the manufacturing lines 24 hours a day and includes 11 processing machines). As of December 31, 2015, Carmel's production capacity for corrugated cardboards in its Caesarea plant is estimated at 95,000 tons. Actual production utilizes 90% of the output capacity at the Caesarea plant The sector has another production site at Caesarea for manufacture of shelf and digital printing products, which is operated 24 hours a day, in three shifts. As of December 31, 2015, the plant's annual production capacity is estimated at 12 thousand tons. Actual production utilizes 90% of the output capacity Fixed assets, real estate and facilities in the packaging and cardboard products operating sector As stated, the sector has two main production sites in Caesarea: (a) a production site located on an area of approximately 90,000 dunam, where corrugated board manufacturing operations are concentrated (the site's lease term is until 2029), and (b) a production site located on an area of approximately 21 dunam, where shelf product manufacturing and digital printing operations are concentrated. The site's lease term is until Fixed Assets The sector's fixed assets primarily include machinery and manufacturing equipment for paper corrugation and processing machines, which perform cutting, printing, gluing and folding actions required for to completing the final product. The sector owns two corrugators and 11 processing 20

28 machines. Carmel also owns a digital printing machine capable of high quality printing on corrugated board and other rigid materials, a range of sales promotion applications, display stands and billboards Raw materials and suppliers in the packaging and cardboard products operating sector The main raw material in the production of corrugated board is packaging paper (recycled and pulp-based). This raw material forms the central component of the cost of sales. Carmel has two central suppliers in the packaging paper sector: (1) Hadera Paper Packaging, that supplies recycled paper. Purchasing from Hadera Paper in 2015 and 2014 amounted to NIS 119 million and NIS 89 million, respectively, representing 56% and 40% of the sector's total annual paper consumption both of these years, respectively; and (2) International Forest Products, a member of the Kraft group, provider of virgin paper (produced from pulp). Purchasing from the Company in 2015 and 2014 amounted to NIS 46 million and NIS 36 million, respectively, that represented 21% and 15% of the sector's total annual paper consumption during those years, respectively. During 2015 there was a moderate decrease of raw material prices in the sector. For additional details regarding paper price trends, see section 7.3 above Moreover, in the packaging products and cardboard products sector there are purchasing contracts with suppliers for the purchase of auxiliary materials such as chemicals, adhesives and various packaging materials. Prices are determined by negotiation with suppliers, every period, accounting for market conditions and prices of competing imports Additional main raw materials used for the manufacture of corrugated board include starch and fuel oil. Starch constitutes as the main component in the adhesive which glues the paper sheets. Galam is the sole manufacturer of starch in Israel, but there is competing starch import at competitive prices. Therefore, the Company believes it is not dependent on Galam as a starch supplier. However, should Hadera Paper Printing discontinue doing business with Galam, short term acquisition expenses might increase, while production shutdown in Galam might cause similar delay in the Group's production. In addition, Carmel uses molds, blocks and wooden pallets that are purchased from a number of local suppliers The sector is not dependent on any of the suppliers outside Hadera Paper Group. It should be noted that Group operations in the sector are dependent on regular availability of raw materials, and therefore, purchasing expenses may rise in the short term Working capital Below is data from the financial statements regarding sector activities: Current assets 215 Current liabilities 206 The amount included in the financial statements as at 2015 (NIS millions) Surplus of assets over current liabilities Raw material and finished goods inventory - The Company maintains operating inventory of finished goods for several days and an inventory of raw materials - primarily paper at consumption level of 2 months. The average days of inventory in this sector in 2015 was 52 21

29 days Average credit duration Below is data regarding average credit duration and amount for suppliers and customers in 2015 and 2014 (in NIS millions): 2015 Average 2014 Average Average credit volume Average credit days Average credit volume Average credit days Customers Suppliers Material agreements Agreement with Frenkel family - in November 2013, Carmel purchased the remainder of holdings in Frenkel CD Ltd. from the Company and Frenkel family, this in return for allocation of Carmel shares. Following transaction completion, as at report date, the Company holds 94% of Carmel's issued share capital (under discount of dormant shares), and Frenkel family holds 6% of Carmel issued share capital (under discount of dormant shares). In accordance with agreement provisions, the parties agreed upon limitations to transfer of shares to a third party, including: a lock-in period that will apply to the sale of Carmel shares held by Frenkel family, right of refusal in case of sale of Carmel shares held by Frenkel family, a drag along right in case of Frenkel family sale to a third party, and a tag along right to the Frenkel family in case of sale of Carmel shares held by Hadera Paper. The agreement includes the Company's right to obligate Frenkel family to sell its Carmel holdings to the Company (Call option), and Frenkel family right to obligate the Company to sell its Carmel holdings to the Frenkel family (Put option). Furthermore, the Frenkel family was granted with a right of minority interest in Carmel. For further details, see Note 5a(3) to the Company's financial statements. Agreement for the lease of Caeserea production sites - for details regarding the lease, see Note 8.10 above Risk factors in the packaging and cardboard products operating sector For details regarding the risk factors relevant to this operating sector, see Section 24 below. 9. Sector of collection and processing services 9.1. Structure of the sector of collection and processing services The main activity within this sector is collection and processing (sorting and compressing) of paper and cardboard waste for recycling purpose, which is carried out by Amnir Paper waste is the Group's key raw material in its activity within the packaging sector, and it is essential for the continuity of paper production by Hadera Paper Printing. Amnir s operations in waste collection and processing constitute a crucial step in the packaging paper production process and the Group's activity. 22

30 Amnir is the largest paper collection and processing company in Israel. Amnir collects paper waste from different sources in Israel. Part of the paper waste collected by Amnir is purchased from third parties. As of report date, Amnir processes (sorts and compresses) at its facilities approximately 345 thousand tons of paper waste per annum. 80% of sold paper waste was sold by Amnir to Hadera Paper Packaging and is used for production of packaging paper by the company Since paper waste is the main raw material for the production of packaging paper, the level of demand for packaging paper which is influenced, inter alia, by market activity volume and export volumes, has a significant impact on demand for paper waste. For further details regarding the paper market, see section 7.3 above In recent years, Amnir has been expanding its activity in the sector of plastic product collection for recycling. The Company intends to continue this trend. During 2015, the Company expanded the plastic recycling plant, this for the purpose of increasing its volume of activity in the sector As part of its activity, Amnir also provides information security and deformation services (shredding services at customer premises or Amnir premises), and production of salvaged paper products. These activities are insignificant for Hadera Paper Limitations, Legislation, Regulations and Special Constraints applicable to the sector of collection and recycling services Considering the nature of this operating sector, Group operations in sector of collection and recycling services are subject to regulation in different aspects, including: environmental protection provisions (such as: Hazard Prevention Law, Hazardous Materials Law, Clean Air Law, Packaging Law), permits and licenses (such as: Business Licensing Law), Anti-Trust (such as: Anti-Trust Law, Consensus Ordinances), Natural Gas Sector Law, etc For further details regarding the regulation that applies to Group s activities in the sector of collection and recycling services, see Section 9.12 below Changes to volume of operations and profitability in the sector of collection and recycling services As stated, paper waste is the main raw material in the production of packaging paper, and therefore fluctuations in demands and prices of packaging paper impact the operation sector Based on internal Company estimates, the consumption of packaging paper in Israel (excluding tissue) averaged approximately 900 million tons per year in recent years In the Company s opinion, the rate of collected paper that was used as a raw material for the production of recycled paper in Israel as a proportion of the total paper consumption in the last year is approximately 45%. It should be noted that based on RISI (PPI) data, the annual average rate of collected paper used as a raw material for the production of recycled paper in Western Europe as a proportion of the total paper consumption is 65% The Company believes that the volume of collected paper used as a raw material for the production of recycled paper in 2015 amounted to 400 thousand tons (excluding waste by corrugators). The Company estimates the volume of collected paper in Israel has grown in recent years, as follows: approximately 2% in 2015, 2% in 2014 and 6% in The Company estimates that there is potential for increase in the volume of paper waste collection in Israel, this inter alia while considering the existing gap between the quantities of consumed paper and the quantities collected for recycling, and the volumes of paper collected in 23

31 Europe Information concerning the potential for an increase in the volume of paper waste collection in Israel constitutes as forward-looking information as defined in the Securities Act and merely consists of forecasts and estimates by the Company which are not certain to materialize and are based on information available to the Company as of report date. The aforementioned Company forecasts and estimates may not materialize, in whole or in part, or may differ from current forecasts and estimates, due to multiple factors, including global supply and cost of paper waste, business opportunities available to the Group, changes in markets in which the Group operates, developments and changes to regulation of the operating sector and/or materialization of any of the risk factors set forth in section 24 hereafter For further details regarding the paper industry, see section 7.3 above Products and Services in the sector of collection and recycling services The main activity of the Group within this sector is carried out by the subsidiary Amnir, and includes the provision of paper waste collection and processing services, where paper waste is used as raw material for production of packaging paper and tissue paper. In recent years, Amnir has been expanding its activity in the sector of plastic product collection for recycling. Amnir is working towards increasing the production capacity of plastic product processing, and in 2015, the Company expanded the plastic recycling plant for the purpose of increasing the volume of its activity in the sector. Amnir also provides information security and deformation services (shredding services), where the shredding waste is also used as raw material for the activity. In addition, Amnir has activity in salvaged paper products. Amnir is taking actions for expanding its activity in these sectors, although as at report date, such activities are not material for Hadera Paper Distribution of revenues from products and services in the sector of collection and recycling services The operating sector's main revenue is derived from the sale of paper waste. Below is information about distribution of revenues from sale of packaging paper (NIS millions) 5 : Product Revenue Percentage of total Company revenues, consolidated Quantity sold (thousand tons) Revenue Percentage of total Company revenues, consolidated Quantity sold (thousand tons) Revenue Percentage of total Company revenues, consolidated Quantity sold (thousand tons) Sale of paper waste % % % Clients of the sector of collection and processing services Approximately 80% of the paper waste collected by Amnir is sold to Hadera Paper Packaging. Approximately 20% of the paper waste collected by Amnir is sold as raw material to other It should be noted that sector revenue (including due to inter-company sales) was taken into account in the calculation of total Company revenue, and total Company revenue, consolidated (net of inter-company sales). 5 24

32 manufacturers (in 2015, mainly to Hogla-Kimberly, Shaniv Paper Industries Ltd, and export). Amnir has no dependence on any individual customer that does not form part of the Hadera Paper Group, nor has it any long-term agreements with said customers. Agreements are mostly signed for a period of one year, and include sale quantity and prices. Most of the customers are long-standing Group customers. As at report date, Amnir estimates that the quantity of paper waste sold to Hogla-Kimberly will significantly decrease in Amnir is preparing for expanding its sales to additional clients and adjusting the quality and specification of its products as an alternative for paper waste import form abroad. Information regarding Amnir preparation for its sales in 2016 is considered forward looking information as defined in the Securities Law, and constitutes as forecasts and assessments on behalf of the Company, the realization of which is not certain and is based on information existing in the Company as of the date of the report. The aforementioned Company forecasts and estimates may not materialize, in whole or in part, or may differ from current forecasts and estimates, due to multiple factors, including global supply and cost of paper waste, business opportunities available to the Group, changes in markets in which the Group operates, developments and changes to regulation of the operating sector and/or materialization of any of the risk factors set forth in section 24 hereafter Competition in the sector of collection and processing services To the best of the Company's knowledge, there are two major competitors in paper waste collection, which operate throughout Israel in KMM Recycling Plants Ltd. and Tal-El Collection and Recycling Ltd. In addition, there are many competitors with a small market share that mainly operate in a limited geography The Company estimates, based on its internal estimates, that Amnir's market share as of the report date in the collection of paper waste (excluding purchasing of waste from KMM and Tal- El) out of total paper waste collected in Israel is equal to 65%. For information about steps taken by Amnir in recent years to increase paper waste collection, see Section 9.10 below Output capacity in the sector of collection and recycling services As at report date, Amnir operates two sorting and compressing facilities for processing collected raw material that are located at the Hadera site and Modi'in logistics center. Below is data with regard to sorting and compressing output (in thousands of tons) of raw materials, primarily paper and board waste, in 2015 and 2014, compared to potential output capacity: 25

33 Modi'in Hadera Total Potential output capacity (in thousands of tons) as at report date Actual output (in thousands of tons) It should be noted that the production capacity of sorting and compressing facilities in Modi'in decreased temporarily during In the beginning of 2016, Amnir took action for purchasing a large press with outputs that will increase production capacity Fixed assets, real estate and facilities in the sector of collection and recycling services Waste collection network - As at report date, Amnir operates a fleet of 137 trucks (out which 76 via sub-contractors) for collection and processing of collected raw material (primarily paper and board waste) Waste recycling - Amnir has two waste recycling facilities located at the Company's site in Hadera (including a facility for sorting, cleaning, and pressing cardboard and paper waste as well as a paper salvage facility), and at the Group's logistics center in Modi'in (that includes a facility for sorting and compressing waste, primarily paper and board waste, and advanced shredding equipment). For details regarding this subject, see section 14 below Plastic processing - during 2015, Amnir expanded the production line intended for plastic processing and manufacturing granulated raw material for the plastic industry, this for the purpose of increasing the volume of its activity in the sector. The plastic processing line is located at the Company's site in Hadera Raw materials and suppliers in the sector of collection and processing services As stated, activity within this sector includes mainly collection, processing and sale of paper waste. Paper waste is collected by Amnir from thousands of sites around Israel and purchased by Amnir from other collectors in Israel and overseas, and is constantly transferred to the processing facilities at Modi'in and Hadera logistics centers Amnir has worked in recent years and continues to work to gradually increase the quantity of paper waste collected by the company. Following are some of the actions taken by the company: Intensifying collection operations with existing customers, establishment of a greater number of municipal paper collection points and development of new collection sources, and focus on collection sources at lower costs, cooperation with local authorities on paper waste collection, dedicated collection from private customers (inter alia, by installing collection containers and removing cardboard from streets), and conducting marketing projects to increase awareness toward waste recycling In the years 2015 and 2014, Amnir collected and purchased paper waste in Israel amounting to 345,000 tons and 359,000 tons, respectively. In 2015, the rate of waste collected by Amnir from additional collection companies in Israel is approximately 12% of total waste treated by Amnir, this compared to volumes at rate of 20%-25% in previous years. Amnir is not dependent on any specific supplier In 2015, the quantity of paper waste imported by the Group for the purpose of obtaining raw material required by the paper machines was marginal, this mainly due to increase the capacity of local paper waste collection. Furthermore, in 2015, Amnir exported paper waste, and it 26

34 expects to continue this export from time to time in Below is graphical depiction of developments in paper waste prices in recent years (according to PPI (RSSI) data): Paper waste prices (USD/ton): As indicated by the graph, there is an evident trend of increase in the average paper waste price, although the price is subject to fluctuations It should be noted that the sale prices of paper waste processed for the packaging paper company are determined according to inter-group consents which mainly take into consideration the global trend of waste prices Working capital Information concerning Amnir estimates of paper waste export in 2016 constitutes as forwardlooking information as defined in the Securities Act and merely consists of forecasts and estimates by the Company which are not certain to materialize and are based on information available to the Company as of the report date. The aforementioned Company forecasts and estimates may not materialize, in whole or in part, or may differ from current forecasts and estimates, due to multiple factors, including global supply and cost of paper waste, business opportunities available to the Group, changes in markets in which the Group operates, developments and changes to regulation of the operating sector and/or materialization of any of the risk factors set forth in section 24 hereafter Below is data from the financial statements regarding sector activities: The amount included in the financial statements as at 2015 (NIS thousands) Current assets 136,509 Current liabilities 66,654 Surplus of assets over current liabilities 69,855 27

35 Below is data regarding average credit duration and amount for suppliers and customers in 2015 and 2014 (in NIS millions): 2015 Average 2014 Average Average credit volume Average credit days Average credit volume Average credit days Customers Suppliers In the area of operation, the average number of inventory days in 2015 was 15 days (including inventory of raw materials and maintenance materials), this as part Amnir's trend of reducing inventory volumes. Raw Material and Finished Goods Inventory Policy: the Company maintains operating inventory of finished goods equivalent to consumption and delivery over 3 weeks - 1 month. In 2014, Amnir held relatively high inventory levels; yet, in 2015, Amnir significantly reduces its inventory quantities. Amnir intends to maintain low inventory levels also during Restrictions on and Supervision of Corporate Operations in the sector of collection and processing services Packaging Law In January 2011, the Formalization of Treatment of Packaging Law was passed (in the Knesset hereinafter: "the Packaging Law") with the goal of regulating arrangements in the matter of treatment of packaging waste. The law led to increasing awareness to recycling, and obligates local and regional authorities to take action for this purpose. Subsequently, the law led to increase in the quantity of paper waste available for collection. Furthermore, since the authorities receive a budget for paper collection services from the declared recycling corporation - TMIR, Amnir's exposure due to these clients has decreased Risk factors in the sector of collection and processing services For details regarding additional risk factors, see section 24 hereafter Special factors Increase in the costs of paper waste collection might significantly impair the sector's profitability. Regulation provisions might cause an increase in collection costs as stated. It should be noted that Amnir estimates that the impact of this risk is low in light of the fact that collection costs are affected by many elements, some of which are controlled by Amnir, and in light of inter-group consents regarding paper waste sale to Hadera Paper Packaging Extent of risk factor impacts Following below is a list of risk factors and their degree of impact on the sector of operations: Risk factors Special Factors Level of Impact Major Impact Medium Impact Minor Impact Paper waste collection costs 28

36 10. Fine paper sector Structure of the fine paper sector In the fine paper sector of activity, the Group engages in the manufacture and marketing of fine paper, and marketing of special paper imported by the Group. The sector's activity is carried out by the Company and its subsidiary. The Group markets fine paper to printing houses, publishing houses, marketers of office supplies, producers of paper products (such as notebooks, envelopes and so on), as well as to wholesalers that operate opposite smaller customers Changes to volume of operations in the sector and its profitability In recent years, the global trend of decrease in fine paper demand continued, this in light of increasing transition to digital media use. Similarly to the trend in recent years, the trend of decrease in demand and increasing competition in the sector continued in As a result, sale prices on the local market continued to erode. The key factors for further decrease of prices at the sector in Israel, inter alia, are the high supply of paper imported from Europe, and recently also from South America countries, Russia and Turkey, this relatively to the decreasing demand level. These trends continued in recent years, and the Company does not expect future significant changes thereof. To the Company's best knowledge, a dumping claim against several large sector manufactures was recently approved in US. In case the claim is accepted, it may lead to directing production surpluses also to Israel, and thus to further increase the competition level. On the other hand, the outcome may create opportunities in the American market for the Company. It should be noted that paper plants have been closing around the world in recent years due to a supply surplus versus decreasing demand. Competition in the sector in Israel increased during the last year, also in light of import expansion The price of pulp, which is the main raw material for paper production, has been fluctuating in recent years. In average, the price of pulp slightly decreased in and increased in 2015, so that prices returned to levels that are similar to market price levels in the first half of Below is graphical depiction of developments in the Company's paper sales prices in recent years (in NIS): 5000 Average sale prices Q Q Q Q Q Q Q Q Q Q Q Q Q Q average local price average export price מחיר ממוצע מקומי מחיר ממוצע מיוצא Q Q As at report date, the Company does not expect change in said price changes in the sector during In 2015, the quantitative sales volume increased by approximately 6% compared to 2014 due to an increase in the quantity of produced paper. 29

37 Within the framework of preparing the financial statements for 2015, the Company examined impairment of its activity in the fine paper sector, due to which it deducted a sum pf approximately NIS 38.9 million from the overall value of fixed assets of the activity sector In view of sector trends, including the competition level, and due to impairment of fixed assets and the accounting implications of the energy array sale as detailed in section 20.3 hereafter and attributing the relative part due to the loss in the sum of approximately NIS 10 million to the activity sector, in 2015, the activity sector recognized operational loss at the sum of approximately NIS 89.8 million. The current operating profit (operating profit net of other revenue and expenses) in 2015 totaled at approximately NIS 36.6 million - an improvement of approximately NIS 62.9 million, compared with the current operating profit last year Aforementioned information regarding the implication of approving the dumping claim in US constitutes forward-looking information as defined in the Securities Law, and constitutes only as forecasts and assessments on behalf of the Company, the realization of which is not certain and is based on information existing in the Company as at report date. Company forecasts and estimates may not materialize, in whole or in part, or may significantly differ from estimates. Main factors which may affect this are business opportunities available to the Group, changes in demand in markets wherein the Group operates, global supply and cost of paper products and/or materialization of any of the risk factors set forth in Section 24 hereafter Developments in the fine paper sector and changes to its customer profile The Group estimates that the fine paper market in Israel has been reducing in recent years in light of ongoing transition to digital media The variables affecting this market are mainly global and local supply and demand ratios for paper products in light of the transition to information consumption via digital media Along with weaker demand worldwide, paper supply increased globally in recent years due to larger production capacity in Asia Pacific. Import of wood-free paper from the Far East to Israel is subject to paper import levies. Furthermore, decrease of demand in Europe resulted in supply increase of paper manufactured in Europe and allocated to export. Increase in supply is partially directed to Israel and adversely affects paper prices. The Company does not expect a change in the demand decreasing trend in the near future Aforementioned information regarding trends in paper demand trends constitutes forwardlooking information as defined in the Securities Law, and constitutes only as forecasts and assessments on behalf of the Company, the realization of which is not certain and is based on information existing in the Company as at report date. Company forecasts and estimates may not materialize, in whole or in part, or may significantly differ from estimates. Main factors which may affect this are business opportunities available to the Group, changes in demand in markets wherein the Group operates, global supply and cost of paper products and/or materialization of any of the risk factors set forth in Section 24 hereafter Substitutes for products in the sector of operations Fine paper sector products have imported substitutes Products and services in the fine paper sector Below is information about Group products in the fine paper operating sector: Pulp-based fine paper production - the Group manufactures and markets fine paper (including 30

38 rolls, sheets and small packages) produced from pulp purchased by the Group Recycled fine paper (RePaper) production - the Group also markets recycled fine paper. The Company completed the development of a 100% recycled paper from paper waste collected in Israel. The paper is produced without the use of bleach or chemicals. The Group markets the recycled paper under the brand name RePaper Sale of imported paper - as aforesaid, the Group compliments its basket of products by importing paper (such as coated, cardboard, duplex and special papers that it does not manufacture) from Europe and the Far East for sale in Israel Distribution of revenues of products and services in the fine paper sector The majority of operating sector revenues are from sale of fine paper, as follows (NIS in millions) 6 : Product Revenue (NIS million) Percentage of total Company revenues, consolidated Quantity sold (thousand of tons) Revenue (NIS million) Percentage of total Company revenues, consolidated Quantity sold (thousand of tons) Revenue (NIS million) Percentage of total Company revenues, consolidated Quantity sold (thousand of tons) Paper from selfproduction Purchased paper % % % % % % 39.9 Total % % % Customers of the fine paper sector The Group markets its produce in the activity sector to a wide variety of clients in Israel and abroad. In 2015, approximately 110 thousand tons of paper produced and sold by this sector were marketed on the local market, while the remainder, consisting of some 46 thousand tons, was designated for export (mainly to US). Marketing abroad is mostly to large wholesalers in the paper sector In Israel, the Group's activity in the sector includes more than 250 customers, whereas key customers include printing houses (approximately 23%), paper wholesalers (approximately 24%), office supplies wholesalers (approximately 23%), manufacturers of paper products (approximately 25%), and others (approximately 5%). It should be noted that during 2015, the Company focused its activity on large clients for profitability purposes The Group has no client in the activity sector whose revenues account for 10% and more of total Hadera Paper revenue in the consolidated statements Marketing and distribution in the fine paper sector Group activity in the sector of operations possesses a local distribution system which provides it It should be noted that sector revenue (including due to inter-company sales) was taken into account in the calculation of total Company revenue, and total Company revenue, consolidated (net of inter-company sales). 6 31

39 with the ability to market its products to a variety of customers operating within the Israeli market. The Group is constantly working towards the improvement and increased efficiency of its local distribution system Marketing and distribution to export markets, mainly US are conducted through agents. The Company believes that should such a sole agent discontinue working with the Group, an alternate agent or another local client could be located within a relatively short time. The Company estimates that such change will not significantly affect the profitability level of export activity. The Company therefore estimates that it has no dependence upon any of the agents or final clients The Group distributes fine paper products from its Hadera site, this after the distribution activity from the logistics center in Modi'in was merged with the Hadera site during Competition in the fine paper sector Competition in this sector continued also in 2015, inter alia, due to decrease in demand and further low-cost imports, which the Company believes resulted from excess global supply, and further strengthening of NIS relative to the Euro Group activity in the sector of operations is exposed to competition from paper importers that do not encounter significant entrance barriers to the Israeli market. In light of the significant competition level, the Group is required to work towards preserving the advantages granted to it as a local manufacturer, such as: availability, flexibility, service and quality, in order to handle its competitors To the best of the Company's knowledge, its main competitors in the segment of activity are the following paper importers: Niris Ltd., Ronaimer Ltd., Allenper Trade Ltd. Durmax Xerox, and Mei Hanahal Ltd. The Company believes that the Group holds a 45% share of the domestic market for fine paper used for writing, printing and other graphical uses. We emphasize that the aforementioned market share is based on the Company's internal assessment as at report date Output capacity in the fine paper sector The Group owns a fine paper production machine (hereinafter: "Machine 4"), which operates 24 hours a day in 3 work shifts (excluding planned maintenance stops). The potential production capacity for this paper machine is approximately 140 thousand tons per annum. The annual production volume of fine paper produced by Hadera Paper Printing amounted to 132 thousand tons in 2015, compared with 114 thousand tons in Fixed assets, real estate and facilities in the fine paper sector Hadera Paper Printing leases from the Company most areas and buildings used by its for production and storage in Hadera. During 2015, Hadera Paper Printing discontinued its distribution activity from the logistics center in Modi'in. For further details regarding the Hadera site, see section 14 below Within the framework of preparing the financial statements for 2015, the Company examined impairment of its activity in the sector, due to which it deducted a sum pf approximately NIS 38.9 million from the overall value of fixed assets of the activity sector. 32

40 Raw materials and suppliers in the fine paper sector The operations in this sector require the following raw materials: Pulp The principal raw material used in the production of paper is pulp. In recent years, Hadera Paper Printing purchases approximately 95,000 tons of pulp per annum, in average According to the agreement between the Company and Mondi Group, the Company was entitled to purchase pulp in bulk as part of acquisitions by Mondi Group which carries out acquisitions for the sector and other Mondi Group plants in Europe. In 2015, the Company initiated the termination of said agreement with Mondi as of the first quarter of To this date, pulp is mainly purchased from abroad within the framework of annual contracts that include a price setting mechanism based on discount rates compared with the index of global market pulp prices As part of the aforesaid, the Group purchases a significant share of total amount of consumed pulp directly from a pulp producer in Chile. The volume of direct purchases from the supplier in 2015 amounted to 48% of total Hadera Paper Printing pulp purchases, and represented 38% of the total purchases by Hadera Paper Printing from all suppliers of raw materials during that year There are several pulp suppliers that are operating worldwide, which allows flexibility of relative consumption of pulp types while switching between various suppliers. Since the global pulp market is relatively large compared with the volume of sector utilization, the sector is not dependent on a specific supplier or pulp type The sector is exposed to fluctuating pulp prices and the impact of exchange rates on pulp cost in NIS. Unusual rises in the prices of pulp could harm Company profitability. For details regarding trends in pulp prices, see section above Purchased paper suppliers - the Group imports paper mainly from APP Group and from Stora Enso. The Group has no dependency on APP and Stora Enso as the aforementioned paper suppliers. In the event that the Group ceases to collaborate with these suppliers, it will be able to purchase paper from other suppliers. Nevertheless, replacement of said suppliers may have an adverse impact on short term sector profitability PCC - Another important raw material in the production of fine paper is PCC (Precipitated Calcium Carbonate). The Group s PCC supplier is Oumya Shefaya Ltd., an Israeli subsidiary under full ownership by the Swiss company Oumya International AG (hereinafter in this section: the supplier ), per an agreement in effect until December 31, The Company is entitled to terminate the agreement, yet it will be required to reimburse the supplier according to agreement provisions. The sector is dependent upon this PCC supplier, such that arrangement cessation would lead to a shortage of PCC and could lead to production cessation until an arrangement is reached with a substitute supplier. The proportion of purchases from said supplier in 2015 and 2014 represented 6% and 7% out of total purchases of raw materials in the sector, respectively (without considering the costs of purchased paper imported by the Company) Starch - Hadera Paper Printing purchases natural starch used in paper production from Galam Ltd. (hereinafter: "Galam"). Other starch types are purchased from additional suppliers. Due to competing import of starch at prices that are competitive with Galam, the Company believes that as at report date, it is not dependent on Galam. However, should 33

41 Working capital Hadera Paper Printing discontinue doing business with Galam, a short-term damage will be incurred. Production shutdown in Galam might cause similar delay in the Group's production. The Group purchases starch from Galam and other suppliers under agreements for the period of several months up to one year. The volume of purchasing from Galam in the years 2015 and 2014 amounted to 4% and 5% out of total purchases made by the activity sector, respectively. The volume of purchasing from other suppliers of starch in the years 2015 and 2014 amounted to 1.1% and 1% out of the total purchases made by the sector, respectively (without considering the costs of purchased paper imported by the Company) Below is data from the financial statements regarding sector activities: The amount included in the financial statements as at 2015 (NIS thousands) Current assets 227,303 Current liabilities 78,964 Surplus of current liabilities over current assets 148, Below is data regarding average credit duration and amounts for suppliers and customers in 2015 and 2014 (in NIS millions): 2015 Average 2014 Average Average credit volume Average credit days Average credit volume Average credit days Customers Suppliers The average days of inventory in this sector in 2015 was 46 days. Decrease in inventory days ensured from streamlining measures implemented in the sector, which included, inter alia, inventory reductions Material agreements in the fine paper sector Oumya Shefaya Ltd. agreement - see section above Agreement between the Company and the Mondi Group On December 2012, the Company completed the purchase of 25% out of Hadera Paper Printing share capital, which was held by Mondi AG (hereafter: "Mondi Group") In accordance with pertaining signed agreements, and subject to law limitations, Mondi Group has undertaken to continue and assist Hadera Printing Paper in the purchase of raw materials (including pulp), provided that the purchase is intended for the consumption of Hadera Printing Paper. The said undertaking is for a period of 10 years as of agreement finalization date, following which each party shall be eligible to terminate the agreement via 34

42 advance notice. In 2015, the Company initiated the termination of said agreement with Mondi as of the first quarter of Furthermore, within the framework of the agreements with Mondi group, the parties agreed upon the appointment of Hadera Paper as an exclusive distributor of wood-free paper from Mondi Group in Israel. This appointment was discontinued in late Risk factors in the fine paper sector For details regarding additional risk factors, see section 24 hereafter Special factors Dependence on a single supplier - This sector is dependent upon the PPC supplier (Oumya Shefaya Ltd.). For further details see section above. Pulp price - as stated, one of the main raw materials utilized by the activity sector is pulp. Increase in global pulp prices might adversely affect sector results. Global fine paper prices - sector products are offered by a variety of manufacturers and marketers worldwide and are imported to Israel on a regular basis by several importers. Product (commodity) prices are determined by global supply and demand, on which the Company has no impact Extent of risk factor impacts Following below is a list of risk factors and their degree of impact on the sector of operations: Risk factors Level of Impact Major Impact Medium Impact Minor Impact Special Factors Pulp price Global fine paper prices Dependence upon a single supplier 11. Office Supplies Marketing sector Structure of the Office Supplies Marketing sector The office supplies marketing sector focuses on marketing office supplies, disposable paper products, office technology, office furnishings, complimentary equipment (dry food, cleaning products), sales promotion products and more. The Group's office supplies marketing activity is carried out by the subsidiary company - Graffiti. Graffiti engages in marketing office supplies to business customers, institutional customers, chains and stores via sales methods that include sales agents, telephone sales and service centers and a B2B e- commerce website. This sector is characterized by numerous local and international brands. In February 2015, the Company signed an agreement for the sale of all its holdings (100%) in Graffiti. The transaction was canceled under consent of both parties in July For further details, see the Company s Immediate Report dated July 23, 2015 (reference number: ). 35

43 11.2. Changes to volume of operations in the sector and its profitability The office supplies market in Israel is affected by paper prices and exchange rates. Moreover, the overall level of economic activity impacts this market, as expressed by the change in consumption habits during periods of recession. Most of the products marketed in this sector are imported, including: various pens, office supplies, shredders, binding machines, disposable paper products etc. Moreover, the Israeli market is also engaged in marketing products acquired from local producers and suppliers, including: office furniture, printers, fax machines, computers and peripherals, food products, toiletry products, etc. The volume of Graffiti activity during 2015 is smaller compared to 2014, and the activity transited into operational loss. The adverse change ensued from, inter alia, the continuation of the interim period between signing the Graffiti sale transaction and cancelation thereof, which led to uncertainty within some of its clients, and due to NIS weakening versus the USD, which caused an increase in the cost of products imported by Graffiti for marketing in Israel Critical success factors in the sector of operations Critical success factors affecting the sector's activity are a high service level which is supported by appropriate logistics, and actions towards cost reduction by improvement of acquisition sources Substitutes for products in the sector of operations The office supplies market is competitive, and products marketed by the Group in the sector have substitutes from competitors Products and Services in the office supplies marketing sector Graffiti specializes in providing comprehensive solutions for office supplies by direct supply to institutions and businesses. Paper products manufactured by the Group in the fine paper sector constitute as one of the main products marketed by Graffiti. Furthermore, Graffiti offers a variety of items to its customers nationwide, and is an exclusive distributor of international brands in the office supply sector via a subsidiary under full ownership. Graffiti has a website directed towards both the business and private sectors (which started operating during 2015), and intended for allowing Graffiti to serve a wider variety of clients without significantly increasing marketing costs The demand for products marketed in this sector of operations is relatively rigid, since it consists mostly of basic office consumables. Despite the aforesaid, during times of recession it is evident that consumption habits tend to change due to a cross-organizational trend of saving and cut-backs, which also includes office supplies. All products marketed by Graffiti have competing products sold by many suppliers and distributors Customers in the office supplies marketing sector Graffiti sells its products to thousands of diverse customers in the business and institutional sectors in Israel only. Graffiti customers include government ministries, banks, HMOs, and other large companies. Amnir has no dependence on any individual customer or a limited number of customers Marketing and distribution in the office supplies marketing sector Graffiti s orders for products in this sector of operations originate from a number of sources (field sales personnel, telephone sales center, and an e-commerce website). Graffiti has three storage and distribution sites - the main and largest site is located in Modi'in, while the other sites are located in Haifa and Tiberias. Graffiti s distribution system is based on a fleet of trucks under operational lease that are backed up by external distribution contractors in cases of peak demand. Graffiti is not dependent upon any of its external contractors. Graffiti started utilizing a computerized planning, distribution, and reporting system 36

44 for the purpose of distribution process streamlining Competition in the office supplies marketing sector The office supplies marketing sector is competitive, with several competitors operating in the Israeli market. The names of Graffiti s major competitors in this sector of operations are: Kravitz (1974) Ltd, Pythagoras (1986) Ltd, Dani ran Supply from the Heart Ltd, Lautman Rimon Ltd, and Pan Office Supply Manufacture and Import Ltd The Company believes that there are several dominant players in the sector of office supplies by direct supply to institutions and businesses as at report date: Graffiti and Kravitz (1974) Ltd., which operate primarily with: (a) customers primarily handled via tenders; and (b) large strategic customers (such as banks and local municipalities). In addition to the entities stated, there are numerous competitors on the business clients market. As of 2014, sector competition increased due to a trend of splitting office supply tenders to several suppliers Graffiti cannot estimate its market share, since the company markets a very large variety of products in the area of office supplies, with the aim of providing comprehensive solutions for supply of various products in the office supplies sector. Consequently, it is difficult to define the relevant market, and Graffiti's share thereof. Graffiti estimates that it constitutes as one of the main suppliers of the office supplies sector in Israel for the institutional market Graffiti handles its competitors by maintaining high standards of quality and service and a nationwide distribution network. The company believes that the size and variety of its products also grant it an advantage over its competitors. Furthermore, Graffiti has an advanced sales and service center, providing fast turnaround times for its customers. Graffiti works towards being the leading supplier in the tenders secured by it Fixed assets, real estate and facilities in the Office Supplies Marketing sector To this date, Graffiti operates mainly from the Group's logistics center in Modi'in. Furthermore, Graffiti leases two additional buildings in Haifa and Tiberias. For details regarding the logistics center, see Section 14 below Working capital Below is data from the financial statements regarding sector activities: The amount included in the financial statements as at 2015 (NIS thousands) Current assets 80,700 Current liabilities 77,600 Surplus of assets over current liabilities 3, Inventory policy - The levels of inventories in the area of office supplies are operational levels that are adjusted to the period of supply and the need to maintain variety. On average, inventory levels amount for approximately 2 months of expected delivery. 37

45 Average credit duration Data with regard to the average period and volume of credit from suppliers and customers during reporting periods during 2015 and 2014 (in NIS million) is provided below: 2015 Average 2014 Average Average credit volume Average credit days Average credit volume Average credit days Customers Suppliers The average days of inventory in this sector in 2015 was approximately 60.4 days Risk factors in the office supplies marketing sector For details regarding additional risk factors, see section 24 hereafter Special factors Exclusive distributor - As stated in section above, Graffiti (via a subsidiary) is the exclusive distributor in Israel several international brand name products in the area of office sup-lies. Graffiti estimates that not constituting as an exclusive distributor may affect its activity Extent of risk factor impacts Following below is a list of risk factors and their degree of impact on the sector of operations: Risk factors Special Factors Level of Impact Major Impact Medium Impact Minor Impact Exclusive distributor 38

46 Chapter D - Additional Information Regarding the Corporation 12. Critical success factors in the packaging paper sector of operations and changes therein Several critical success factors may be indicated for Group operations in the packaging paper sector, which impact its operations: Quality of leading products and customer service - high level quality and service mainly contribute to preserving existing clients. High product quality, availability and quality customer service are important success factors in this operating sector Local producer For several operating sectors of the Group, a local producer enjoys an advantage over imports, as the former is able to ensure constant supply of the product at a relatively short lead time and at the size and quality required by customers, thereby saving them the need to maintain large inventories. In some cases, the Group is the only packaging paper producer in Israel, and therefore enjoys an advantage in this operating sector Condition of Israel's economy a significant share of Group products is intended, directly or indirectly, for industry, agriculture and the food and the beverage sectors. As a result, extensive current economic activity has a positive material impact on the demand for these products. On the other hand, an economic crisis or a slowdown in economic activity will possess an adverse impact on the aforesaid Financing capability - The Group's activity sectors are characterized with significant investment in machine and infrastructure construction, and in ongoing equipment maintenance. Consequently, financing capabilities constitute an advantage in the sector of operations. It should be noted that during the last year the Company took measures for reinforcing its financial stability and reducing leverage, this inter alia for the purpose of improving its financing capability. For details regarding success factors in the office supplies marketing sector, see section 11.3 to the Periodical Report. 13. Major barriers to entry and exit in the Group's activity sectors and changes therein There are several entry barriers affecting a company's ability to enter activity in the various sectors of operations: Tier 1 capital - Since the paper industry is capital intensive with heavy investment required in infrastructure and equipment (such as paper machines, presses, corrugators, trucks and other expensive machinery, paper waste processing systems and associated infrastructure), entry into this operating sector requires significant Tier 1 capital. Moreover, even after conducting initial investments for establishing the necessary infrastructure for entering the sector, this area of operations requires significant investment in ongoing equipment maintenance Limited customers - This operating sector typically has a limited number of customers. This fact, along with the competitive environment of this operating sector, makes it difficult for a new companies to enter the market since customers are hard to recruit as they often have longterm relationships with paper producers and/or importers Brand building and development capability - Penetration to some Company sectors of operation requires an extended period of time, inter alia due to the importance of reputation and leading brands in the sector. Furthermore, since the sector is characterized with advanced technology, entry into the sector would require technological know-how, development capabilities and frequent technological improvements. 39

47 The Company believes that there are no material exit barriers from this segment. It should be noted that in some cases, discontinuation of operations would require arrangements to be made with customers concerning conclusion of product inventory delivery as well as arrangement of payments to suppliers. Furthermore, with regard to payment of fixed expenses, the Company would be required to make appropriate arrangements, since some of these fixed expenses cannot be discontinued immediately. 14. Fixed assets, real estate and facilities Following below are details regarding fixed assets and facilities in use by the Group: Company Headquarters and main production and storage facilities are located in Hadera (hereinafter: "the Company site") on an area covering approximately 273 dunam (hereinafter: "the area"), part of which is owned by the Company (approximately 201 dunam), while the other part (approximately 72 dunam) is leased from the Israel Land Administration (hereinafter: "ILA"). Pursuant to the leasing agreements, the lease is terminate between the years 2018 and Some of the leasing agreements are under capitalization conditions. Some of the area is leased to third parties Moreover, the Company leases from the ILA an area of 25 dunam in Nahariya at which the plant for the manufacture and processing of paper is located until The area is rented out to Hogla-Kimberly. In addition, the Company also leases from ILA an area of 3.5 dunam in Nahariya that is also rented out to Hogla-Kimberly. Agreements regarding further lease of real estate by Hogla-Kimberly were signed within the framework of the Hogla-Kimberly sale In addition to the aforesaid, Company subsidiaries own and/or lease factories, offices and warehouses at various locations around the country, whereas the central sites are the logistics center in Modi'in and two production sites in Caesarea. For details regarding the agreement for the lease of the logistics center in Modi'in, see Note 13g to the Company's financial statements for Infrastructure array - For the purpose of paper manufacturing activity, the Group maintains a network of complementary services for group companies operations at the Company site in Hadera that are provided by Hadera Paper Infrastructures. Some stated services are also provided in return for a fee to additional companies operating at the Company site, including Hogla-Kimberly and ICPower Ltd. The infrastructure array includes a wastewater facility, joint warehouses for spare parts and hazardous materials, a process laboratory, catering site, and critical systems (firefighting and water system). It should be noted that the costs of infrastructures activity in the Company's financial statements are attributed to the packaging paper and fine paper sectors of activity. It should be noted that infrastructures array assets are attributed to the packaging paper and fine paper sectors of activity, this according to the volume of services provided to each stated sector. 15. Human resources Organizational structure In recent years, the Company is taking efficiency and savings measures for the purpose of addressing the changing business environment of the Company's sectors of operation. Within the framework, the Company took measures for reinforcing its financial stability, and reducing leverage and Company fixed costs. Furthermore, the Company has been and is taking measures for increasing the synergy between Group units and streamlining their activities, including by consolidating some production sites and flattening the organizational structure, including workforce and senior executives base reduction along with decrease of Group headquarters and the number of executives. 40

48 Following is a diagram of the Company's organizational structure as at report date: Hadera Paper Human Resources Operations Legal Finances Carmel Amnir Graffiti Paper plant Subsidiaries Staff employed according to sectors of activity As at December 31, 2013, the Company, directly or indirectly through its subsidiaries, employed staff in the five segments of operation described in sections 7-11 above, as follows: in the packaging paper segment employees, in fine paper segment 545 employees, in the paper waste collection and processing segment 385 employees, in the packaging and cardboard products segment employees, and in the office supplies segment employees. Furthermore, 127 employees are employed in the Company's infrastructures sector, while Company headquarters include 59 employees. The total number of employees employed by the Company and its subsidiaries is 1,682 and 1,756 as of December 31, 2015 and 2014, respectively Employment agreements As of December 31, 2015, employees of the Company and its subsidiaries are employed under two types of agreements; 796 employees are employed under collective agreements and general extension orders in the field of industry that apply thereto (of which 246 are temporary employees), and 830 employees are employed under personal contracts. Furthermore, as at December 31, 2015, the Group employs 56 workforce employees Collective Labor Agreements As stated above, as at report date, 796 employees of the Company and subsidiaries operating in Hadera, Caesarea and the logistics center in Modi'in are employed under special collective agreements which are renewed once in every 2-3 years. Out of these, 361 are operating at the Company site in Hadera (273 permanent employees and 88 temporary employees). In late 2013, in light of a strike at the Company's site in Hadera and hearings regarding the matter at the Labor Court, the Company and the committee of unionized workers employed at the Company's site in Hadera reached consent according to which the collective agreement applying to both parties that was supposed to be in force on December 31, 2013 will be extended until June 30, In March 2015, the Company and the committee of unionized workers employed at the Company's site in Hadera (approximately 350 temporary and permanent employees at that date) signed an amendment to the collective agreement applying to both parties, which includes changes that pertain to, inter alia, the early retirement of up to 20 unionized employees under customary Company terms. For details, see the Company s Immediate Report dated March 24, 2015 (reference number: ). 41

49 Due to the purchase of Company control by FIMI as detailed in section 2.2 above, on August 13, 2015, the Company's Board of Directors approved the grant of a non-recurring bonus at a total sum of approximately NIS 3.1 million to Company employees which were parties to the wage reductions instituted by the Company in recent years, employees employed under the collective agreement and employees employed under individual contracts, exclusive of employees classified as Company position holders. Given that the non-recurring grant is carried out on the grounds of the transaction for Company control transfer, the former controlling shareholder of the company, CII, has undertaken to carry the full cost of the non-recurring grant as stated. It should be noted that during 2015, after finalizing the transaction for the sale of Company holdings in Hogla-Kimberly, the bargaining unit of Hogla-Kimberly employees was separated from the Company's unit. A collective agreement was signed in 2014 with Amnir employees (162 permanent workers are employed at Amnir as at December 31, 2015) Personal employment agreements As aforesaid, as of reporting date, 830 employees of the Company and its subsidiaries are employed under personal employment contracts Agreements with senior officers Senior management employees of the Company are employed under personal contracts As stated above, the Company's senior executive base changed due to reduction in the number of senior executive positions In August 2014, Mr. Shlomo Liran was appointed as the Company CEO, and replaced Mr. Ofer Bloch who served at this position since For further details regarding the the retirement terms of Mr. Ofer Bloch, see the Company's Immediate Report dated February 26, 2015 (reference number: ). In January 2015, Mr. Liran announced the termination of his employment due to disagreements regarding the Company's activity methods and directions. For further details regarding the the retirement terms of Mr. Shlomo Liran, see the Company's Immediate Report dated February 12, 2015 (reference number: ). After receiving his notice, it was decided upon the appointment of Mr. Gadi Cunia, the Company's CFO as the Acting CEO. For further details, see the Company's Immediate Report dated January 20, 2015 (reference number: ) In light of Company control purchase, the management services agreement between the Company and Clal Industries and Investments Ltd. that included active Chairman of the Board services was terminated. For further information about Company officers, see Chapter D of the Periodical Report (Additional Information about the Company) Compensation policy In accordance with the provisions of The Companies Law (Amendment 20) , the Company adopted a compensation policy pertaining to service and employment terms of Company officers. The compensation policy was approved and amended by the Company's General Meeting, this further to obtaining approval by the Compensation Committee and the Company's Board of Directors. For details concerning the remuneration policy of the company and the updated format of the remuneration policy, see the Company's Immediate Report dated 42

50 August 26, 2014 (reference number: ). The compensation terms for Company officers comply with compensation policy provisions Remuneration of Directors For details about the compensation of Company directors, see Chapter D to the Periodical Report (Additional Information about the Company) Letters of Indemnification and Liability Insurance For details regarding letters of indemnification given to directors and officers of the Company and insurance policies that the Company purchased to insure the Company directors and officers, see Chapter D to the Periodical Report (Additional Details Regarding the Corporation) Employee stock option plans For details regarding the option plan for Company employees, see Note 10.b-d to the Company s financial statements for the year Restrictions and Supervision of Company Operations The Natural Gas Market Council s decision regarding capacity exhaustion events In accordance with the decision by the Natural Gas Market Council, criteria were set for the distribution of natural gas pipeline capacity during capacity exhaustion events. According to the Gas Council s decision, such events are expected to occur between the years 2015 and Per set criteria, the Company is included among consumers that are entitled to receive only a proportionate part of remaining capacity during a Capacity Exhaustion Event as stated (it should be noted that at this date, capacity exhaustion events are yet to occur). At this stage, the Company does not have any data which allows it to assess the frequency of Capacity Exhaustion Events and the proportionate part that it will receive at the time of such an event, and therefore it also cannot assess the effect of this Decision on its activities. According to Company agreements with ICPower, as detailed in section 20.2 hereafter, the occurrence of the event stated may impose additional costs on the Company; in case the discount on the electricity price is canceled for this period and the Company will be obligated to purchase alternative fuels for steam generation The Internal Enforcement Program with Regard to Securities The Company adopted an internal enforcement plan which includes internal working procedures with regard to securities, designed to implement norms of compliance with the Companies Law and securities statutes by the Group, and to reduce exposure by the Group, its management and staff to any administrative enforcement proceedings. The enforcement program includes internal procedures which deal, inter alia, with the Company s reporting obligations per the Securities Law, the identification and manner of approval of transactions with interested parties, the classification of transactions as nonexceptional transactions, work procedures for the Board of Directors, the Audit Committee and the Financial Statements Review Committee, prohibition against the use of inside information, Group employees reporting regarding flaws, and protection of whistle-blowing employees Concentration Law The Law for the Promotion of Competition and Reduction of Concentration, (hereinafter: "the Concentration Law") was published on records in December The Concentration law imposes, inter alia, limitations on public firms and bond companies of pyramid structure which consists of more than two tiers, and included limitations on parallel service of directors in a substantial financial entity and real substantial entity. The Concentration Law also imposes on state authorities to take into 43

51 account concentration and competition considerations when allocating rights, such as licenses in the area of essential infrastructures, etc. The list of centralizing entities, significant real corporations, and significant financial entities was published in December The Company is included in the list of centralizing entities as a significant real corporation, and therefore the said limitation regarding director service also applies to the Company Control over effectiveness of internal auditing of financial reporting and disclosure The Company operates according to standards that comply with the provisions of I-SOX regulations. For details regarding the effectiveness of internal auditing at the Company, see the report regarding the effectiveness of internal auditing of financial reporting and disclosure in Chapter E to the Report. 17. Financing - Reportable credit The Company finances its activity from its independent sources, through the capital markets and loans from banks and financial institutions. It should be noted that as of this date, the Company issued 6 bond series. As of report date, the Company had fully repaid the debentures (Series 1, 2 and 4) The Company has defined material reportable credit in its separate or consolidated financial statements, as any credit agreement which constitutes 5% or more of total liabilities in the solo or consolidated financial statements, respectively The following is information about material credit agreements and debenture series of the Group: 44

52 Borrowing corporation Total debt (NIS million) Description of debt and collateral Lending corporation Interest Loan terms Linkage mechanism Repayment schedule Company As at : 70.8 Bond Series 3: In 2008, the Company has issued NIS 187,500 thousand par value of bonds: (hereafter: "Series 3 Debentures"), CPI-linked, each with a par value of NIS 0.01, in return for financial remuneration of NIS 187,500 thousands. The debentures are not convertible into Company shares. Institutional investors and the Public The outstanding balance of debentures bears average interest of 4.65% per annum and effective interest of 4.8% per annum. Debenture principal and interest are linked to the known CPI (basis - CPI for May 2008). The unpaid balance of debentures (Series 3) as at December 31, 2015, in the amount of NIS 70.8 million, is repayable in 3 equal annual installments on July 10 of each of the years 2016 through Company As at : Bond Series 5: In May 2010, July 2011, June 2012 and October 2012, the Company issued NIS 521, 519 thousand par value of NIS bonds: (hereafter: "Series 5 Debentures") for consideration of NIS 518,807 thousand. The debentures are not convertible into Company shares. Institutional investors and the Public The unpaid balance of debentures bears average interest at 5.85% per annum, and effective interest of 6.22% per annum. The weighted discount rate specified for all debentures (Series 5) issued by the Company is approximately %. Unlinked The unpaid balance of debentures (Series 5) as at December 31, 2015, in the amount of NIS million, is repayable in 2 equal annual installments on November 30 of each of the years 2016 through

53 Borrowing corporation Total debt (NIS million) Description of debt and collateral Lending corporation Interest Loan terms Linkage mechanism Repayment schedule Company As at : Bond Series 6: In June 2013, January 2014, February 2014, July 2014, and October 2014, the Company issued NIS 574,761 thousand par value of bonds: (hereafter: "Series 6 Debentures") for consideration of NIS 588,701 million. The debentures are not convertible into Company shares. Within the framework of the debentures (Series 6) trust deed, the Company committed to comply with the following financial covenants: (1) Minimal equity of NIS 400 million for a period exceeding two successive quarters. As at report date, the Company complies with the said financial covenant its equity is NIS million. For further details, see section 5.4 to debentures (Series 6) trust deed; and 46 Institutional investors and the Public The unpaid balance of debentures bears average interest at 5.89% per annum, and effective interest of 5.5% per annum. The weighted discount rate specified for all debentures (Series 6) issued by the Company is approximately %%. Non-linked The unpaid balance of debentures (Series 6) as at December 31, 2015, in the amount of NIS million, is repayable in 9 equal annual installments that will be repaid as follows: (i) three (3) equal installments at rate of five percent (5%) from par value of debenture principal will be paid on December 30 of each of the years 2016 through 2018; (ii) four (4) equal installments at rate of ten percent (10%) from par value of debenture principal will be paid on December 30 of each of the years 2019 through 2022; (iii)

54 Borrowing corporation Total debt (NIS million) Description of debt and collateral Lending corporation Interest Loan terms Linkage mechanism Repayment schedule (2) The ratio between the Company s equity (as set forth in Series 6 debentures) and the Company s total consolidated balance (hereafter: equity-balance ratio ) will not be less than 23% for a period exceeding two successive quarters. As at report date, the Company complies with the said financial covenant - equitybalance ratio is 24.3%%. For further details, see section 5.3 to debentures (Series 6) trust deed. two (2) equal installments at rate of twenty percent (20%) from par value of debenture principal will be paid on December 30 of each of the years 2023 through 2024 (inclusive). (3) The Company undertakes not to distribute any dividend and/or to make any purchase of its own shares in any case whereby subsequent to the dividend distribution and/or the purchase of its own shares, as the case may be, its shareholders' equity, according to the audited or reviewed consolidated financial statements of the Company, as the case may be, will decrease to reach a point below NIS 500 (five 47

55 Borrowing corporation Total debt (NIS million) Description of debt and collateral Lending corporation Interest Loan terms Linkage mechanism Repayment schedule hundred) million. Furthermore, within the framework of the debentures (Series 6) trust deed, the Company undertook that as long as the debentures (Series 6) have not been repaid in full, the Company shall not create nor shall agree to create, in favor of any third party, any degree of permanent liens on its overall property, to secure any debt or liability, without contacting the Trustee in writing prior to creating any such lien, to inform him accordingly, and will also create in favor of the debenture holders (Series 6), in parallel and simultaneously with the creation of the lien in favor of the third party, a permanent lean of an equal degree, pari passu according to the ratio of debts, to secure the outstanding balance of the debt toward the debenture holders, and that this lien will remain in effect as long as the 48

56 Borrowing corporation Total debt (NIS million) Description of debt and collateral Lending corporation Interest Loan terms Linkage mechanism Repayment schedule debentures (Series 6) have not been repaid in full, or until the cancellation of the lien that was granted in favor of the third party, as aforementioned. For additional details, see section 5.2 to the debenture (Series 6) trust deed. Company As at : 29.8 Long-term loans: Credit obtained in 2009, amounting to NIS 100,000 thousand, for financing construction of Machine 8. The Company undertook a negative pledge with respect to this loan. Institutionals Average and effective interest of 6.30%. Non-linked Repayment dates: January and July of Below is information about the material credit facilities of the Group: Borrowing corporation Credit line* as at (NIS million) Utilization of credit line as at (NIS million) Applying corporation limitations Financial contingencies Compliance with financial contingencies as at 31/12/2015 Headquarters and other consolidating companies None None N/R N/R 49

57 17.5. Following below are details regarding additional credit assumed by the Group companies: Borrowing corporation Longterm / Shortterm loan Total debt (NIS million) Lending corporation Average interest Effective interest Loan terms Linkage mechanism Repayment dates Applying corporation limitations Financial contingencies Compliance with financial contingencies as at 31/12/2015 Carmel Long term Short term As at : 18.7 As at : 64.6 Leumi, Mercantil and HaPoalim banks Leumi, Mercantil, Discount, Mizrahi and HaPoalim banks 3.85% 3.91% Non-linked % 2.32% Linked to Prime 2016 None Collateral of fixed assets None N/R N/R 50

58 17.6. The Company has no restrictions on obtaining credit, nor any restriction which materially increases the cost of raising new capital or debt, other than as described above For further information regarding the bonds, see Note 9 to the Company's consolidated financial statements as of December 31, 2015, attached to this Report Except for the aforementioned undertakings of the Company and its subsidiaries (detailed above), the Company does not have additional financial covenants On-call loans held by the Company bear a variable interest rate. Interest update is carried out at the time of the Bank of Israel s change in interest rates. During the years 2015, 2014 and 2013, the average interest rate due to the aforementioned loans was 2.2%-3.8%, 2.2%-4.6% and 2.5%-5.1%, respectively The interest rate for on-call loans in proximity to the date of this report is 2.2%-3.65% Interest rates on prime-linked loans in 2015 were 3.1%-3.25%. The weighted interest rate on prime-linked loans in proximity to the date of the report was 3.1% As of the report date, the Company possesses a credit rating of ila / Stable by Maalot Standard & Poor's (hereinafter: "Maalot"), while the debentures (Series 3-6) issued by the Company are rated ila. For details regarding the history of the rating of the Company and its debentures see the Company's Immediate Reports dated February 25, 2016 (reference number: ). 18. Taxation For details see Note 12 to the Company s financial statements as at December 31, 2015, attached to this Report. 19. Environmental Risks and Management thereof Environmental risks which have or may have substantial impact on the Company Wastewater: wastewater created during the Company s production processes contains materials with a potential to harm water sources upon reaching these without proper treatment treated. The Company discharges treated wastewater into the Hadera stream pursuant to a permit from the Manager of the Government Water and Sewage Authority by virtue of the Water Act, 1959 (hereafter: "the Water Act"). In accordance with Water Law provisions, breach of an authorization order grants relevant authorities permission to activate enforcement and penalty measures detailed in the law, including imposing administrative and criminal measures against the Company and/or its officers, and invalidation of the authorization order, which may obligate the Company to take various measures, such as: reducing production outputs, changing the product mix, and even shutting down some of its production facilities. The current authorization permit under which the Company operates is valid up to May 25, 2016 (hereinafter: "the authorization order"), and is renewed annually. The permit includes various provisions, including conditions for discharging treated wastewater, setting its term and obligatory reporting. As at report date, The Company complies with the provisions of the Permit. The Company estimates that the authorization order will be extended. The Company continues to invest in improving processes at the wastewater facility and its equipment for further fulfillment of authorization order provisions. 51

59 Hazardous Materials: the Company uses hazardous materials (mainly flammable materials) At its sites, which if not controlled could cause damages to people and to the environment. These materials are kept by the Company pursuant to a poison permit issued by the Ministry of Environmental Protection by virtue of the Hazardous Material Law, The toxins permit includes provisions concerning proper storage of hazardous materials, and is valid through July 6, The Company is working to comply with the toxins permit and does not anticipate any issue pertaining to current permit renewal upon its expiration Noise: operations at the Company's facility in Hadera involve noise, which may be a nuisance for neighboring residents. The Company takes the necessary measures to comply with noise levels prescribed in the Regulations for Prevention of Hazards (Unreasonable Noise) In-process waste: facility s operations involve generation of process waste produced that is transferred to the dairy-farming industry (for use as padding and for solidification), and large waste (rejects), which is sent to be buried at a site approved for mixed waste Company estimates regarding potential renewal of the aforementioned permits constitute forward-looking information as defined in the Securities Law, and constitute only as forecasts and assessments on behalf of the Company, the realization of which is not certain and based on information existing in the Company as at report date. Company forecasts and estimates may not materialize, in whole or in part. Moreover, the actual results may differ from the current estimates and forecasts, and naturally, permits and orders may be obtained subject to determined terms, this due to various factors, including business opportunities available to the Company, regulatory developments and changes in the sector of operations including the environment and/or the realization of any the risk factors outlined in section 24 hereafter Substantial Ramifications of the Law on the Corporation The provisions of law in effect on the date of this report having substantial ramifications on the Company, including on its capital investments, profits and competitive status: Pursuant to the Business Licensing Law, 1968, the facility has a business license issued by the relevant local authority - Municipality of Hadera. The Company plant s business license includes, inter alia, terms prescribed by the Ministry for the Protection of the Environment, designed to protect the environment and prevent nuisances. The Company believes that these terms are acceptable for similar facilities. Within the framework of business permit terms update, the Company was required to meet additional terms. The Company submitted all required documents within the framework of terms update The Company is required to keep and use hazardous materials for its manufacturing operations. This activity is subject, inter alia, to the Hazardous Materials Law, and the regulations enacted thereunder, and requires maintaining a valid toxins permit. The toxins permit is granted under conditions pertaining mainly to the storage and use of these materials for the purpose of preventing incidents. The Company believes that the conditions in the toxins permit are customary for plants of this type. The plant holds a valid permit which is typically renewed annually upon filing the appropriate application. The Company is working to meet the conditions of this permit The Company discharges wastewater into the Hadera River in accordance with the permit order stated in Section above, after treatment as part of a purification process in the Company s facility. 52

60 Upon finalizing the sale of the power station which was operated by the Company at its Hadera site, the Company's plant is not regarded as a plant which requires a permit in accordance with the provisions of the Clean Air Law, Details of material proceeding related to environmental protection to which the Company or senior officer thereof is party On January 30, 2011, The Ministry of Environmental Protection held a hearing for the Company regarding suspicion of water pollution due to discharging low quality wastewater into the Hadera Stream. Following the hearing proceeding as described, an inquiry was launched into the Company and officers thereof. On July 13, 2014, the Company and some of its officers received an indictment in this matter, due to infringing the Water Law and the Business Registration Law. The defendants pleaded guilty, and the Company was convicted. Within the framework of the verdict, the court imposed a fine at rate of NIS 200 thousand on the Company. The court did not convict defendants who are position holders, and imposed on them the execution of public service and severance payment to the Maintenance of Cleanliness Fund. It should be noted that in January 2015, the Company received a request for the approval of a class action lawsuit due to damages allegedly sustained by the public on account of the pollution of the Hadera Stream, allegedly caused by the Company, and in light of the said indictment. The class action was dismissed and the request was deleted upon consent Details of Company policy on environmental risk management which has or is expected to have material impact on the Company, implementation and supervision thereof, including measures taken by the Company to mitigate environmental risk The Company acts in accordance with an environmental management system managed using environmental protection procedures. The principles of environmental protection procedures are consistent with the requirements of Israeli standard ISO 14001/2004, and all Company divisions have been authorized by the Israel Standards Institute with regards to this standard. The Company has appointed a Ph.D in environmental engineering as the responsible party for the matter of environmental protection Information regarding amounts awarded, provisions recognized in the financial statements and other environmental cost applicable to the Company as described below (if material for the Company) The Company invested NIS 2 million in infrastructure relating to environmental protection in The expected 2016 budget for investments in environmental protection is NIS 2 million. 20. Material Agreements Agreement for the sale of Company holdings in Hogla-Kimberly The transaction for Company sale of its full direct and indirect holdings in Hogla-Kimberly (49.9%) to Kimberly-Klark, which as at transaction signing date held 50.1% of Hogla-Kimberly's share capital (hereafter: "Hogla-Kimberly transaction") was finalized on March 16, Following is a description of the main aspects of the Transaction: Kimberly-Clark paid the Company an amount of NIS 650 Million (hereafter: the purchase Price"), a part thereof in consideration for Hogla-Kimberly's shares and a part thereof as detailed in Section in consideration for the Non-Competition Undertaking. In addition, until transaction finalization date, Hogla-Kimberly will return to the Company sums provided by the Company to Hogla-Kimberly in the amount of approximately NIS 4 Million. 53

61 The sale of Hogla-Kimberly's shares by the Company is on an "As Is" basis. The transaction includes representations relating, inter alia, to the incorporation of the parties to the agreement, the authority of the parties to the agreement to enter into the agreement, the Company's rights in Hogla-Kimberly's shares and the purchaser's financial ability to acquire the shares In addition, as part of the Transaction, the Buyer released the Company and related parties thereof from any claim arising prior to finalization, including unknown claims, other than claims for fraud As part of the transaction, the Company undertook not to compete with Hogla-Kimberly's existing activities (hereafter: the Non-Competition Undertaking"). The Non-Competition Undertaking is subject to obtaining approval by the authorities (hereafter: approval by the authorities") and shall be valid for a period of 3 years from the latest of the closing date or the date of such approval by the authorities. Within the transaction s framework it was agreed, inter alia, that the Company may continue to operate in its existing activities and that such activity will not be considered a competition with the existing activities of Hogla-Kimberly In consideration of the Non-Competition Undertaking, Kimberly-Clark will pay the Company a total amount of NIS 40 Million, as follows: (a) a total of NIS 14 Million was paid on the closing date; (b) an additional amount of NIS 13 Million will be paid one year after the date of the first payment; (c) an additional amount of NIS 13 Million will be paid two years after the date of the first payment. At the Company's request, the said amount was placed in escrow by Kimberly- Clark Agreements for further lease of real estate from the Company by Hogla-Kimberly were signed within the framework of the transaction. Furthermore, the parties reached consent regarding further provision of some services provided by the Company to Hogla-Kimberly. The parties are negotiating the provision of remaining services. For further details, see the Company's Immediate Report dated January 26, 2015 (reference number: ) and March 16, 2014 (reference number: ) Agreement for the sale of Company holdings in Advanced Integrated Energy Ltd Within the framework of a transaction that was finalized on August 10, 2015 between the Company and ICPower Ltd. (hereafter: "ICP"), the Company sold all its holdings in Advanced Integrated Energy Ltd, a subsidiary fully owned by the Company (hereafter: "Integrated Energy"), which holds a contingent permit for the construction of a power station at output of 120MW, including owner loans provided by the Company, and the Company's existing energy center equipment to ICP (hereafter: "ICP transaction") In return, the Company received a total amount of NIS 60 million The Company assigned to ICP the agreement for the supply of the Company's natural gas with Tamar Project, as well as the natural gas transmission agreement with INGL Within the framework of the ICP transaction, the Company entered into agreements with Integrated Energy regarding supply of all electricity and steam required to it from the power station that will be constructed by Integrated Energy for a period of 18 years after the date of commercial operation of the power plant constructed by Integrated Energy. The agreements included agreed upon electricity charge rates payable by the Company, which reflect a discount compared to the Electric Corporation, and a minimal annual quantity of steam that the Company has undertaken to purchase (take or pay conditioning). In 54

62 addition, the Company entered into land lease agreements with Integrated Energy, according to which the Company will lease to Integrated Energy the land on which the existing energy center is located and the area next to the Company s factory in Hadera that is designated for power plant construction. The lease period will continue for 20 years from the date of commercial operation of the power plant constructed by Integrated Energy. The responsibility of the ICP to the Company shall be limited to the total annual rent paid by it in the past year. It should be noted that due to the transaction, the Company recognized loss due to impairment in the amount of approximately NIS 26.7 million in its financial statements. For further details, see the Company's Immediate Report dated June 8, 2015 (reference number: ) and August 10, 2015 (reference number: ) and Note 14(k)(5) to the Company's financial statements for Agreement for the sale of holdings in Graffiti On February 11, 2015, the Company signed a definitive agreement for the sale of all its holdings (100%) in Graffiti to Kravitz (1974) Ltd. On July 23, 2015, the Company announced that the parties agree to cancel the deal without either party having claims against the other and due to receipt of documents Antitrust Commissioner regarding transaction finalization. For further details, see the Company's Immediate Report dated July 23, 2015 (reference number: ) Letters of indemnification: Pursuant to decisions by the General Meeting of Company shareholders, the Company grants letters of indemnification to all its Board members and officers. For further information about letters of indemnification approved and the wording thereof, see the Company's Immediate Report dated November 23, 2011 (reference number: ) Agreement for logistics center lease: For information about the lease agreement between the Company and Gav-Yam Land Corporation Ltd., see section 14.4 above Agreement with Tamar project partners: In January 2011, the Company signed an agreement (which was amended in October 2012) for the purchase of natural gas with the partners in Tamar project (hereinafter: "Tamar agreement"). For details regarding the agreement, see section 21.6 to the Company's Periodical Report for 2014, as published on March 19, 2015 (reference number: ). As stated in section above, in August 2015, the Company assigned the Tamar agreement to ICP, and as at report date, the Company is not a party to the agreement, as stated Agreement with Israel Natural Gas Lines Ltd: For details regarding the agreement, see section 21.7 to the Company's Periodical Report for 2014, as published on March 19, 2015 (reference number: ). As stated in section above, in August 2015, the Company assigned the agreement to ICP, and as at report date, the Company is not a party to the agreement, as stated. 21. Legal Proceedings With regard to legal proceedings described in the financial statements, see Note 12 to the Company's financial statements as of December 31, 2015 attached to this report. 22. Business objectives & strategy and anticipated development over the next year In recent years, the Company is taking efficiency and savings measures for the purpose of addressing the changing business environment of the Company's sectors of operation. Within this framework, in the last year, the Company took actions for reinforcing its financial stability and reducing leverage, inter alia via exercising its holdings in sectors that are not included in its business core, shares issuance, capital raising, and taking operational streamlining measures intended for improving its profitability. 55

63 22.2. In March 2015, the Company completed the sale of all its holdings in Hogla-Kimberly, this in return for approximately NIS 650 million. A transaction was finalized in August 2015, within the framework of which the Company sold all (100%) holdings (direct and indirect) in Advanced Integrated Energy Ltd. and the company's existing energy center equipment (including the company's power station) to ICPower Ltd, this in return for a total of approximately NIS 60 million. For additional details, refer to Section 20 above. Moreover, during December 2015, the Company issued ordinary shares in return for approximately NIS 150 million. For further details, see section 4 below. Furthermore, the Company has been and is taking measures for increasing the synergy between Group units and streamlining their activities, including by consolidating some production sites and flattening the organizational structure, including workforce reduction along with decrease of Group headquarters and the number of executives. As evident from the Company's financial statements for 2015, the Company estimates that these streamlining processes are productive and lead to improving Company results In parallel, the Company continues a process of business focus on the recycling and paper sectors along with reinforcing developing activity sectors and supporting activity sectors suffering from erosion considering the challenging activity markets. The Company continues to review its activities in the various sectors, and is examining opportunities for capital investments or purchasing activities that may have potential as growth engines which can be incorporated in its business In the packaging paper sector, in recent years the sectors engages in development of paper types based on 100% recycled fibers, whose high quality allows replacing packaging paper based on pulp in the corrugated board industry in Israel and overseas, thus providing an improved profitability potential. In addition, the Group has worked in recent years and continues to work to develop export markets for the sale of production surpluses that are not absorbed by the domestic market The packaging and cardboard products sector takes measures intended for gradually expanding the proportion of recycled paper use out of the raw materials used for the production of its products at the expense of virgin (pulp-based) paper. It should be noted in this respect that there is a trend of increased use of recycled materials on account of virgin paper use in Israel and worldwide In the sector of collection and recycling services, Amnir has worked in recent years and continues to work to gradually increase the quantity of paper waste that collected by it, with the goal of continuing to supply the required material for the Group's paper machines, this by reducing collection costs. In recent years, Amnir has been expanding its activity in the sector of plastic product collection and processing for recycling. In 2015, Amnir expanded the capabilities of its plastic recycling plant In the fine paper segment, the Company takes action for handling further competition in the sector and sale prices erosion, this inter alia by utilizing its advantages as a single local manufacturer, paper machine streamlining, development of additional products, and complementing the product range by import of papers whose local production is not profitable. As stated above, the Company does not estimate that the trend of decrease in demand and increase in supply which as stated, led to decrease in sector prices and profitability erosion (inter alia) may change in the near future In the office supplies sector, in light of Graffiti sale transaction, Graffiti is working towards increasing it sales and product range in order to return to profitability The Company is reviewing and promoting ways for reducing the volume of sewage discharged from the Company site into the Hadera stream, improving sewage quality and transferring part of the sewage for repeated use on-site. The Company's strategic goals as described above are based on the Company's objectives and ambitions as of the reporting date and could change in accordance with relevant decisions made by the Company. 56

64 23. Risk factors General The Company conducts periodical discussions between relevant parties regarding market risks and exposure to exchange rate and interest rate fluctuations, in order to reach decisions in this matter. The officer responsible for the implementation of the market risk management policy at the Company is Gadi Cunia, the Group s VP of Finance and Acting Chief Executive Officer Macro-Economic Risk Factors Exposure to Fluctuations of the Index, Exchange Rate, and Credit Risks For details regarding this risk, see section H2 to the Company s Board of Directors report Geopolitical situation in Middle Eastern countries The instability trend in several Middle Eastern countries, as well as trends which might result in termination of business activity between corporations from several countries and Israel might adversely affect Company results. The Group is continuously acting to reduce exposure to such implications, inter alia, by diversification of suppliers and reviewing potential new export markets Security risk Company facilities, management, and most of its employees are located in Israel, and therefore worsening of the security situation may have an adverse impact on Group activities Increasing input and raw material costs An increase in the prices of inputs and raw materials, particularly the prices of paper, electricity, water, transport, pulp and starch could adversely affect the Company s profitability Sector-Specific Risk Factors Competition - the Company's sectors of operation are competitive, whereas in some sectors competition is against local manufacturers, while in others the competition is against imported products. Entry of new competitors and/or expansion of activity by existing competitors, and/or an increase in import quantities may adversely affect the Group's volume of activity and its financial results Special factors Dependency on a single steam and electricity supplier - as detailed in section 20.0 above, within the framework of the ICP transaction, the Company sold the power station operated by it, which provided all Company steam needs and partial electricity needs, and entered into agreements with Integrated Energy for the supply of all electricity and steam required to it from the power station that will be constructed by Integrated Energy for a period of 18 years after the commercial operation date of the power station constructed by Integrated Energy. Discontinuation of regular supply of the steam required for the Company's production activity may have a significant affect on Company activity Environmental protection - Requirements of the Ministry of Environmental Protection with regard to the Company's operations and its facilities require the Company to allocate financial resources for this issue. These requirements may expand and proliferate due to increasing awareness toward environmental protection and developing regulation in this area, which may 57

65 force the Company to allocate further financial resources. Furthermore, since the Company is involved with use of hazardous and toxic materials, it is exposed to damage which may be caused by such materials, including health impact, environmental impact, damage due to ignition of flammable materials, etc. Hence, the Company is exposed to claims which may negatively impact the business results of the Company as well as the Company's reputation. It should be noted that the Group companies use toxic materials. For additional details, refer to Section 19 above Closing of ports - Most Group companies import a large share of the raw material used for manufacturing their products, and export some of their products. Shutting down the seaports in Israel will impact the import of raw materials as well as export, and will directly impact Company operations. However, considering that most Group companies maintain an inventory of raw materials, the Company believes that shutdown of ports for several days will have a minor impact on Group operations Manufacturing and Distribution sites of The Company and Group companies The production activity of Group companies is centralized at three main sites. Impact to one or more of the production and/or distribution sites may materially impact the financial results of Group companies Extent of risk factor impacts Following below is a list of risk factors and their influence upon the Company. For details regarding the Company's assessment of the type and degree of influence of additional special risk factors, see sections 7.19, 8.17, 9.14, 10.17, and above. Risk factors Level of Impact Major Impact Medium Impact Minor Impact Macroeconomic factors Increasing input and raw material costs Customer credit risks Exchange rates Exposure to index changes Security risk Geopolitical situation in Middle Eastern countries Sectoral factors Competition Special factors Single steam and electricity supplier Environmental protection Port closure The Company's manufacturing and distribution sites 58

66 Part B Management Discussion and Analysis

67 Hadera Paper Ltd. Maizer Street, Industrial Zone POB 142, Hadera Company headquarters: Tel: Fax: March 6, 2016 Board of Directors Report The Board of Directors of Hadera Paper Ltd. ( The Company or Hadera Paper ) is hereby honored to present the Management Discussion as at December 31, 2015, reviewing the principal changes in Company operations during 2015 ( The Report Period" or "The Reported Period"). The report was formulated in accordance with the Securities Regulations (Periodic and Immediate Reports), a. Description of the Corporation's Business 1. Company Description Hadera Paper and its subsidiaries are engaged in the manufacture and sale of packaging paper, corrugated board packaging, consumer product packaging and unique packaging for industry, collection services, processing and recycling of paper and plastic waste, manufacture and marketing of fine paper and marketing of office supplies. On March 16, 2015, the Company sold its holding in an associated company, Hogla-Kimberly (hereafter: "Hogla"). As of August 13, 2015, the holder of control of Hadera Paper is FIMI investment fund. For further details, see Note 1a to the financial statements as at December 31, The Company s securities are listed on the Tel-Aviv Stock Exchange. This report includes or may include data, estimated and assessments by Company management, including in the context of developments associated with the paper sector and its products, and/or to related sectors, including the regulatory and/or fiscal aspect of the paper sector and/or related sectors, both in the State of Israel and in foreign countries. The Company has no control of and/or capability to forecast and/or affect such regulatory and/or fiscal processes, and thus such data is entirely regarded as forward-looking information. 2. General U Principal Current Operations 2.1. The Business Environment The estimated growth rate of the Israeli market in 2015 based on the forecast of the Bank of Israel is approximately 2.3%. Following is the change in exchange rates and the Consumer Price Index: 1